SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION
STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
FACTORY CARD & PARTY
OUTLET CORP.
(Name of Subject
Company)
FACTORY CARD & PARTY
OUTLET CORP.
(Name of Person(s) Filing
Statement)
COMMON
STOCK, PAR VALUE $0.01 PER SHARE
(Title
of Class of Securities)
303051106
(CUSIP
Number of Class of Securities)
Gary W.
Rada
President and Chief Executive Officer
Factory Card & Party Outlet Corp.
2727 Diehl Road
Naperville, Illinois
60563-2371
(630) 579-2000
(Name,
Address and Telephone Number of Person Authorized to Receive
Notices
and Communications on Behalf of the Person(s) Filing
Statement)
With copies to:
Neal Aizenstein, Esq.
Sonnenschein Nath & Rosenthal LLP
7800 Sears Tower
Chicago, Illinois 60606
(312) 876-8000
o
Check the box if the
filing relates solely to preliminary communications made before
the commencement of a tender offer.
TABLE OF CONTENTS
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Item 1.
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Subject
Company Information.
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(a) Name
and Address.
The name of the subject company is Factory Card &
Party Outlet Corp., a Delaware corporation (the
Company), and the address of the principal executive
offices of the Company is 2727 Diehl Road, Naperville, Illinois
60563-2371.
The telephone number of the principal executive offices of the
Company is
(630) 579-2000.
(b) Securities.
The title of the class of equity securities to which this
Solicitation/Recommendation Statement on
Schedule 14D-9
(as amended from time to time, this
Schedule 14D-9)
relates is the Companys common stock, par value $0.01 per
share (the Shares or the Company Common
Stock). As of September 27, 2007, there were
3,386,117 shares of Company Common Stock outstanding.
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Item 2.
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Identity
and Background of Filing Person.
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(a) Name
and Address.
The name, business address and business telephone number of the
Company, which is the person filing this
Schedule 14D-9
and the subject company, are set forth in Item 1(a) above.
(b) Tender
Offer.
This
Schedule 14D-9
relates to the tender offer by Amscan Acquisition, Inc., a
Delaware corporation (Purchaser) and a wholly-owned
subsidiary of Amscan Holdings, Inc., a Delaware corporation
(Parent), to purchase all of the outstanding Shares
at a purchase price of $16.50 per Share (such amount, or any
greater amount per share paid pursuant to the Offer, being
hereinafter referred to as the Per Share Amount or
the Offer Price), without interest thereon and less
any required withholding taxes, net to the selling stockholders
in cash upon the terms and subject to the conditions set forth
in the Offer to Purchase, dated October 1, 2007 (the
Offer to Purchase), and in the related Letter of
Transmittal (which, together with the Offer to Purchase,
constitutes the Offer). The Offer is described in a
Tender Offer Statement on Schedule TO (as amended or
supplemented from time to time, the
Schedule TO), filed by Parent and Purchaser
with the Securities and Exchange Commission on October 1,
2007.
The Offer is being made pursuant to the Agreement and Plan of
Merger, dated as of September 17, 2007, by and among
Parent, Purchaser and the Company (as it may be amended from
time to time, the Merger Agreement). The Merger
Agreement provides that, among other things, subject to the
satisfaction or waiver of certain conditions, following
completion of the Offer, and in accordance with the Delaware
General Corporation Law (the DGCL), Purchaser will
be merged with and into the Company (the Merger).
Following the consummation of the Merger, the Company will
continue as the surviving corporation (the Surviving
Corporation) as a wholly-owned subsidiary of Parent. At
the effective time of the Merger (the Effective
Time), each issued and outstanding Share (other than
Shares owned by the Company or its subsidiary, Parent,
Purchaser, or any other direct or indirect subsidiary of Parent,
and Shares held by stockholders who have perfected their
statutory dissenters rights of appraisal under
Section 262 of the DGCL) will be automatically converted
into the right to receive an amount in cash equal to $16.50 per
Share (the Merger Consideration), without interest
thereon and less any required withholding taxes. The Merger
Agreement is summarized in Section 12 of the Offer to
Purchase.
Parent formed Purchaser in connection with the Merger Agreement,
the Offer and the Merger. The Schedule TO states that the
principal executive offices of each of Parent and Purchaser are
located at 80 Grasslands Road, Elmsford, New York 10523.
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Item 3.
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Past
Contacts, Transactions, Negotiations and
Agreements.
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Except as set forth in this
Schedule 14D-9
and in the Companys Proxy Statement on Schedule 14A
filed with the SEC on June 1, 2007 and the Companys
Information Statement attached hereto as Annex II, which
are incorporated in this
Schedule 14D-9
by reference, as of the date of this
Schedule 14D-9,
there are no material agreements, arrangements or understandings
and no actual or potential conflicts of interest between the
Company or its affiliates and (i) its executive officers,
directors or affiliates, or (ii) Parent, Purchaser or their
respective executive officers, directors or affiliates.
(a) Arrangements
with Current Executive Officers and Directors of the
Company.
In considering the recommendation of the board of directors of
the Company (the Company Board or
Companys Board of Directors) as set forth in
Item 4 below, the Companys stockholders should be
aware that certain executive officers and directors of the
Company have interests in the Offer and the Merger, which are
described below, which may present them with certain potential
conflicts of interest. The Company Board is aware of these
potential conflicts and considered them along with the other
factors described in this Item 3 and Item 4 below.
Current
Employment Agreements
The Companys wholly-owned subsidiary, Factory Card Outlet
of America, Ltd. (the Subsidiary) has an employment
agreement with each of Gary W. Rada, the Companys
President and Chief Executive Officer; Timothy F. Gower, the
Companys Senior Vice President, Operations; and Michael
Perri, the Companys Senior Vice President
Merchandising and Marketing (collectively, the Employment
Agreements). In connection with the execution of the
Merger Agreement, each of Messrs. Rada, Gower and Perri
entered into an amendment to his Employment Agreement, effective
upon consummation of the Merger, extending the term thereof and
amending certain provisions therein, as described in more detail
below under Amended Employment Agreements; Agreement with
Timothy Benson.
The following summary of the Employment Agreements does not
purport to be complete and is qualified in its entirety by
reference to the full text of the Employment Agreements, as
amended, which are filed as Exhibits (e)(2), (e)(3), (e)(4),
(e)(5), (e)(6) and (e)(7) hereto and are incorporated herein by
reference.
Term.
The agreements with Messrs. Rada,
Gower and Perri provide for the continued employment of each in
his present capacity with the Company through April 8, 2009
for Mr. Rada and through April 7, 2008 for
Mr. Gower and Mr. Perri, provided that in each case
such term is automatically extended for subsequent one-year
terms unless either the executive officer or the Company give
written notice to the other of a desire not to extend at least
60 days prior to the end of the initial term or any
additional term, as applicable. The agreements also provide for
severance benefits to be paid in certain circumstances as
summarized below.
Severance Payments.
Under the terms of the
Employment Agreements with each of Messrs. Rada, Gower and
Perri, if the executive officer is terminated without cause or
resigns with good reason during the term, he is entitled to
receive: (1) any accrued and unpaid salary and bonus and a
prorated bonus in respect of the fiscal year in which
termination occurs, calculated at the executive officers
target bonus level; (2) a severance payment, payable in
cash in equal installments over the Severance Period (as defined
below) (or in a lump sum payment upon a change of control),
equal to the quotient obtained by dividing the number of days in
the Severance Period by 365 times the sum of (x) the
executive officers then current annual base salary and
(y) the executive officers target bonus;
(3) full acceleration of vesting on stock options,
restricted stock (other than those with performance vesting) and
any other awards under any equity based incentive arrangement;
and (4) continuation of medical and health benefits for the
executive officer, his spouse and other dependents for the
Severance Period.
The Severance Period for Mr. Rada is the greater of
18 months or the remainder of the term; provided that such
period shall be 36 months if Mr. Rada is terminated
without cause or resigns for good reason
after a change in control. The Severance Period for each of
Messrs. Gower and Perri is the greater of
3
12 months or the remainder of the term; provided that such
period shall be 18 months if such executive is terminated
without cause or resigns for good reason
after a change in control.
The consummation of the Offer will constitute a change in
control under each Employment Agreement, as Purchaser will
have acquired more than 30% of the beneficial interest in the
outstanding equity of the Company.
The Employment Agreements also provide that the Company will pay
an amount necessary to reimburse each executive officer on an
after-tax basis, for any excise tax due under Section 4999
of the Code as a result of such payment constituting a
parachute payment under Section 280G of the
Code. Finally, to the extent required by Section 409A of
the Code, any severance payment to an executive officer shall
not be made before six months after the executive officers
termination of employment; provided that any such payment that
is delayed must be deposited in a trust pending payment to the
executive officer.
Applicable Restrictive Covenants.
In exchange
for the above benefits, the Employment Agreements impose certain
obligations on the executive officer that apply during
employment (before or after a change of control) and after any
termination of employment, including terminations of employment
before any change of control happens, and regardless of the
reason for termination of employment. These are an obligation to
maintain the confidentiality of Company confidential
information, as well as covenants for specified time periods not
to engage directly or indirectly in competition with the
Company, and not to solicit employees, customers, vendors and
suppliers away from the Company or otherwise interfere with the
Companys employee, customer, vendor and supplier
relationships. A competing business includes any business or
entity (a) engaged in the operation of retail stores for
the primary purpose of selling greeting cards, gift wrap and
party supplies and which operates such retail stores in any
market in which the Company is operating a retail store at the
time of the executive officers termination of employment,
or a market into which the executive officer knows the Company
is intended to enter or (b) engaged in the primary business
of the manufacture and distribution of greeting cards, gift wrap
and party supplies. The executive officer agreed that these
covenants may be specifically enforced against him by injunction.
Amended
Employment Agreements; Agreement with Timothy
Benson
As a condition to Parents willingness to enter into the
Merger Agreement, the Company, the Subsidiary and Parent entered
into agreements (the Executive Agreements) with each
of Messrs. Rada, Gower and Perri, which, among other
things, amend their existing Employment Agreements. The
Executive Agreements will become effective upon consummation of
the Merger. The Executive Agreements, among other things,
(i) extend the term of the Employment Agreements to
April 7, 2010 with respect to Mr. Rada and
April 7, 2009 with respect to Messrs. Gower and Perri
(provided that in each case such term is automatically extended
for subsequent one-year terms unless either the executive
officer or the Company give written notice to the other of a
desire not to extend at least 60 days prior to the end of
the then-applicable term), (ii) provide that if an
executive is provided a notice not to extend the term of such
executives Employment Agreement and the executive
continues to be employed by the Company or an affiliate thereof
after the expiration of the term of such executives
Employment Agreement, such executive shall participate in the
Severance Plan (described below), (iii) clarify that any
changes to an executives duties and authority caused
solely and as a direct and proximate result of the Company
becoming a privately-held subsidiary of Parent or certain of its
affiliates would not constitute good reason as
defined in the Employment Agreements and the Severance Plan and
(iv) confirm (with respect to Messrs. Gower and Perri)
that consummation of the Offer would constitute a change
of control under the Severance Plan and that the
severance period would be 18 months for
purposes of such Plan if such executive becomes entitled to
severance benefits under such Plan within two years after
consummation of the transactions contemplated by the Merger
Agreement. Mr. Radas Executive Agreement further
provides that (a) Mr. Rada will serve as a member of
the Companys Board of Directors during the term of the
agreement and (b) the severance period under
Mr. Radas Employment Agreement is the greater of
18 months or the remainder of the term of the agreement;
provided that such period shall be 36 months if
Mr. Radas employment with the Company is terminated
during the term of the agreement (but prior to April 8,
2009) by the Company without cause or by
Mr. Rada with good reason, in each case
4
after a change of control. Consummation of the Offer would
constitute a change of control under the Employment
Agreements.
As a condition to Parents willingness to enter into the
Merger Agreement, the Company and Parent also entered into an
agreement (the Benson Agreement) with Timothy
Benson, the Companys Vice President, Treasurer and Chief
Executive Officer, which will become effective upon consummation
of the Merger. The Benson Agreement, among other things,
(i) provides for the Companys continued employment of
Mr. Benson as an at-will employee following the closing of
the Merger, (ii) clarifies that any changes to an
executives duties and authority caused solely and as a
direct and proximate result of the Company becoming a
privately-held subsidiary of Parent or certain of its affiliates
would not constitute good reason as defined in the
Severance Plan and (iii) confirms that consummation of the
Offer would constitute a change of control under the
Severance Plan. Mr. Benson currently participates in the
Severance Plan.
On the date of the consummation of the Merger and pursuant to
the foregoing agreements, Parent will cause its parent, AAH
Holdings Corporation (AAH), to grant
Messrs. Rada, Gower, Perri and Benson nonqualified options
to purchase 30, 20, 24 and 24 shares, respectively, of
common stock of AAH under the AAH Holdings Corporation 2004
Equity Incentive Plan at an exercise price equal to the fair
market value of the common stock on the date of grant. One-half
(50%) of the options will vest in equal annual installments over
a period of five years following the date of grant, and the
remaining one-half (50%) will be subject to performance vesting
in accordance with the terms specified in the applicable option
agreement. The options subject to time vesting will immediately
vest upon the consummation of any sale transaction
(as defined in the applicable option agreement) involving the
Company and certain of its affiliates which occurs after the
consummation of the Merger.
The foregoing summary of the Executive Agreements and the Benson
Agreement does not purport to be complete and is qualified in
its entirety by reference to the full text of the Executive
Agreements and the Benson Agreement, which are filed as Exhibits
(e)(11), (e)(12), (e)(13) hereto and (e)(14) and are
incorporated herein by reference.
Severance
Plan
The Company has an Executive Severance Plan (as amended, the
Severance Plan) which covers each officer of the
Company who is not party to an employment agreement with us
(currently five officers, including one executive officer). The
following summary of the Severance Plan does not purport to be
complete and is qualified in its entirety by reference to the
full text of the Severance Plan, which is filed as Exhibit
(e)(8) hereto and incorporated herein by reference.
Under the Severance Plan, a participant in the Severance Plan
who is terminated without cause or terminates his or
her employment for good reason is entitled to
severance pay equal to the sum of six months of salary plus the
pro rata target annual bonus the participant would have been
entitled to had he or she remained employed until the end of the
fiscal year in which termination occurred, payable over a period
of six months. In the event such termination occurs within two
years after a change in control, the participant would be
entitled to severance pay equal to the sum of 18 months of
salary plus pro rata target annual bonus, payable in a single
lump sum payment. However, to the extent required by
Section 409A of the Code, any severance payment to a
participant shall not be made before six months after the
participants termination of employment; provided that any
such payment that is delayed must be deposited in a trust
pending payment to participant. The participant is also entitled
to a continuation of health and life insurance benefit plans
(but not any disability plan or 401(k) plan) during the period
of severance payments. Finally, in the event the termination
occurs within two years after a change in control, all of the
participants equity awards would become fully vested and
exercisable.
The consummation of the Offer will constitute a change in
control under the Severance Plan, as Purchaser will have
acquired more than 30% of the beneficial interest in the
outstanding equity of the Company. Timothy J. Benson, the
Companys Vice President, Treasurer and Chief Financial
Officer, is not a party to an employment agreement with the
Company and is entitled to the benefits of the Severance Plan.
5
The Severance Plan provides that prior to July 1, 2009 or,
in the event that the Offer is consummated, December 31,
2011, no amendment, modification, suspension or termination of
the Severance Plan may adversely affect the rights of any
participant without his or her written approval unless required
by law.
Agreements
With Other Non-Executive Officers
As a condition to Amscans willingness to enter into the
Merger Agreement, the Company and Parent entered into agreements
with Edward Plesa, Debra Smetana, Robert Krentzman and Eugene
Koch, non-executive officers of the Company, which will become
effective upon consummation of the Merger. These agreements,
among other things, (i) provide for the Companys
continued employment of such persons as at-will employees
following the closing of the Merger, (ii) clarify that any
changes to any such executives duties and authority caused
solely and as a direct and proximate result of the Company
becoming a privately-held subsidiary of Parent or certain of its
affiliates would not constitute good reason as
defined in the Severance Plan and (iii) confirm that
consummation of the Offer would constitute a change of
control under the Severance Plan. All of the foregoing
executives currently participate in the Severance Plan.
On the date of the consummation of the Merger and pursuant to
the foregoing agreements, Parent will cause AAH to grant each of
Ms. Smetana and Messrs. Plesa, Krentzman and Koch
nonqualified options to purchase 14, 15, 12 and 14 shares,
respectively, of common stock of AAH under the AAH Holdings
Corporation 2004 Equity Incentive Plan at an exercise price
equal to the fair market value of the common stock on the date
of grant. One-half (50%) of the options will vest in equal
annual installments over a period of five years following the
date of grant, and the remaining one-half (50%) will be subject
to performance vesting in accordance with the terms specified in
the applicable option agreement. The options subject to time
vesting will immediately vest upon the consummation of any
sale transaction (as defined in the applicable
option agreement) involving the Company and certain of its
affiliates which occurs after the consummation of the Merger.
Tabular
Presentation of Potential Change of Control
Benefits
The following table shows the amount of potential cash severance
and other benefits that would be paid or provided to each of
Messrs. Rada, Gower and Perri, including the estimated
value of continuing health and dental benefits for the
applicable Severance Period but excluding the value of
previously vested equity awards, based on compensation and
benefit levels in effect on the date of this
Schedule 14D-9,
assuming the executive officers employment terminates
under circumstances (e.g., without cause or for
good reason) that entitle him to severance
immediately following the consummation of the Offer. The table
shows the benefits that would be paid or provided to
Mr. Benson, based on compensation and benefit levels in
effect on the date of this
Schedule 14D-9,
assuming that his employment terminates under circumstances that
entitle him to severance under the Severance Plan immediately
following the consummation of the Offer.
Cost of outplacement is estimated based on the named executive
officers base compensation and the outplacement
arrangements the Company currently has in effect. For purposes
of the
Section 4999 gross-up,
the amount in the table is based on the assumptions of an excise
tax rate of 20%, a marginal federal income tax rate of 35.0%, a
1.45% Medicare tax rate, state income tax rate applicable to the
named executive officer, and the assumptions that no amounts
will be attributed to reasonable compensation before or after
the change of control and that no value will be attributed to
the named executive officers non-competition covenant. The
value of health plan benefits is based upon the current cost of
such benefits to the Company in light of the coverage options
elected and assumes that the executive officers will continue
paying applicable employee (or retiree) premiums for such
coverage for the maximum period permitted by the Agreement. The
table also assumes that the named executive officer will not
incur legal fees or related costs in enforcing his rights under
his employment agreement or the Severance Plan, as applicable.
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Continued
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Cash
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Medical/
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Excise tax
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Name
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Bonus
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Severance
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Outplacement
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Dental
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Gross-Up
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Gary W. Rada
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$
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934,500
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$
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1,335,000
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$
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42,000
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$
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9,346
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$
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863,170
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Timothy J. Benson
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61,250
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315,000
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21,000
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14,114
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0
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Timothy F. Gower
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214,480
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536,200
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28,000
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13,100
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0
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Michael Perri
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156,000
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390,000
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21,000
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13,282
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0
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Equity
Grants in Current Fiscal Year
On April 24, 2007, the Company granted stock options in
accordance with its compensation policy for non-employee
directors. The stock options were granted at an exercise price
equal to $11.52 per share. Pursuant to the Merger Agreement,
immediately prior to the Effective Time, each outstanding stock
option will be canceled in exchange for a cash payment equal to
the excess (if any) of $16.50 per share over the options
per share exercise price, without interest thereon and less any
required withholding taxes. See Stock Options and Unvested
Restricted Shares below for additional information.
The following table shows the number of stock options granted to
each director on April 24, 2007. Other than the grants
listed below, no grants have made to any executive officer or
director of the Company during the current fiscal year, and
pursuant to the Merger Agreement, no such grants are permitted
to be made prior to the closing of the Merger without the prior
written consent of Parent.
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Name of Non-Employee Director
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Stock Options (#)
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Mone Anathan
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5,000
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Richard E. George
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10,000
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Ben Evans
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5,000
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Peter M. Holmes
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5,000
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Martin G. Mand
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5,000
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Patrick W. OBrien
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5,000
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Robert S. Sandler
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5,000
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Director
and Officer Indemnification and Insurance
Section 145 of the DGCL permits a Delaware corporation to
include in its charter documents, and in agreements between a
corporation and its directors and officers, provisions expanding
the scope of indemnification beyond that specifically provided
by current law. The Company has included in its amended and
restated certificate of incorporation (the Charter),
a provision to limit or eliminate the personal liability of its
directors to the fullest extent permitted under Delaware law, as
it now exists or may in the future be amended. In addition, the
Charter provides that the Companys directors will not be
personally liable for monetary damages to the Company or its
stockholders for breaches of their fiduciary duty as directors,
except (a) for any breach of the directors duty of
loyalty to the Company or the Companys stockholders,
(b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
(c) for any liability under Section 174 of the DGCL
(unlawful payment of dividends or unlawful stock purchases or
redemptions) and (d) for any transaction in which the
director derives an improper benefit.
The Charter also contains provisions permitting the Company to
indemnify directors and officers of the Company to the fullest
extent permitted by the Delaware General Corporation Law. The
by-laws of the Company (the Bylaws) provide that the
Company is required to indemnify and hold harmless each person
who was or is made a party or is threatened to be made a party
to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a
proceeding), by reason of the fact that he or she is
or was a director or officer of the Company or is or was serving
at the request of the Company as a director, officer, employee,
fiduciary, or agent of another corporation or of a partnership,
joint venture, trust or other enterprise including service with
respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity or in any
other capacity while serving as a director, officer,
7
employee, fiduciary or agent, to the fullest extent which it is
empowered to do so by the DGCL, as it now exists or may in the
future be amended, against all expense, liability and loss
(including, without limitation, attorneys fees) actually
and reasonably incurred by such person in connection with such
proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The By-laws also require that the
Company advance the expenses of an indemnified person defending
a legal proceeding after it receives an undertaking from the
person to repay such advance if a court ultimately determines
that he or she is not entitled to indemnification. The By-laws
further require the Company to pay any expenses of an
indemnified person in connection with such person enforcing
their indemnification rights. The Company maintains a directors
and officers liability insurance policy that provides for
indemnification of its directors and officers against certain
liabilities incurred in their capacities as such.
Pursuant to the Merger Agreement, Parent has agreed that, from
and after the Effective Time, it shall, and shall cause the
Surviving Corporation to, indemnify and hold harmless the
individuals who at any time prior to the Effective Time were
directors or officers of the Company or any of its present or
former subsidiaries (the Indemnified Parties)
against any costs or expenses (including reasonable
attorneys fees), judgments, fines, losses, claims, damages
or liabilities in connection with actions or omissions occurring
at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement) to the fullest extent
permitted by law, and that Parent shall, and shall cause the
Surviving Corporation to, promptly advance expenses as incurred
to the fullest extent permitted by law. In addition, the Merger
Agreement provides that certificate of incorporation and bylaws
of the Surviving Corporation must contain the provisions with
respect to indemnification set forth in the Charter and Bylaws
of the Company on the date of the Merger Agreement, which
provisions thereafter will not, for at least six years after the
Effective Time, be amended, repealed or otherwise modified in
any manner that would adversely affect the rights thereunder of
the Indemnified Parties, unless such modification is required by
law.
The Merger Agreement further provides that Parent will, for not
less than six years from the Effective Time, cause to be
maintained in effect the current policies of directors and
officers liability insurance and fiduciary liability
insurance maintained by the Company and the Companys
subsidiaries for the Indemnified Parties and any other
employees, agents or other individuals otherwise covered by such
insurance policies prior to the Effective Time (collectively,
the Insured Parties) with respect to matters
occurring at or prior to the Effective Time (including the
transactions contemplated by the Merger Agreement), to the
extent that the aggregate cost is not greater than 300% of the
annual premium paid by the Company for such existing insurance;
provided that Parent may substitute therefor policies of
substantially the same coverage containing terms and conditions
which are no less advantageous to the Insured Parties.
(b) Arrangements
with Purchaser and Parent.
Merger
Agreement
The summary of the Merger Agreement contained in Section 12
of the Offer to Purchase filed as Exhibit (a)(1)(A) to the
Schedule TO and the description of the conditions of the
Offer contained in Section 14 of the Offer to Purchase are
incorporated herein by reference. Such summary and description
are qualified in their entirety by reference to the Merger
Agreement, which is filed as Exhibit (e)(1) hereto and is
incorporated herein by reference to provide information
regarding its terms.
The Merger Agreement has been attached as an exhibit to provide
investors and security holders with information regarding its
terms. It is not intended to provide any other factual
information about the Company. The representations, warranties
and covenants contained in the Merger Agreement were made only
for the purposes of such agreement and as of specified dates,
were solely for the benefit of the parties to such agreement,
and may be subject to limitations agreed upon by the contracting
parties. The representations and warranties may have been made
for the purposes of allocating contractual risk between the
parties to the agreement instead of establishing these matters
as facts, and may be subject to standards of materiality
applicable to the contracting parties that differ from those
applicable to investors. Investors are not third-party
8
beneficiaries under the Merger Agreement and should not rely on
the representations, warranties and covenants or any
descriptions thereof as characterizations of the actual state of
facts or condition of the Company or Parent or any of their
respective subsidiaries or affiliates. In addition, the
assertions embodied in the representations and warranties
contained in the Merger Agreement are qualified by information
in confidential disclosure schedules that the parties have
exchanged. Accordingly, investors should not rely on the
representations and warranties as characterizations of the
actual state of facts, since (i) they were made only as of
the date of such agreement or a prior, specified date,
(ii) in some cases they are subject to qualifications with
respect to materiality, knowledge
and/or
other
matters, and (iii) they may be modified in important part
by the underlying disclosure schedule. Moreover, information
concerning the subject matter of the representations and
warranties may change after the date of the Merger Agreement,
which subsequent information may or may not be fully reflected
in the Companys public disclosures.
Confidentiality
Agreement
Goldsmith, the Companys financial advisor, and Parent
entered into a confidentiality agreement, dated April 24,
2007, in connection with the consideration of a possible
negotiated transaction involving the Company. Under the
confidentiality agreement, the parties agreed, subject to
certain exceptions, to keep confidential any non-public
information concerning the Company and agreed to certain
standstill provisions for the protection of the
Company. The Company is a third party beneficiary of the
confidentiality agreement and is entitled to enforce its terms.
This summary of the confidentiality agreement does not purport
to be complete and is qualified in its entirety by reference to
the confidentiality agreement filed as Exhibit (e)(16) hereto
which is incorporated herein by reference.
Stock
Options and Unvested Restricted Shares
Pursuant to the Merger Agreement, immediately prior to the
Effective Time, each unexpired and unexercised option or similar
rights to purchase Shares (the Options) under any
equity compensation plan of the Company, including the 2002
Stock Option Plan, 2002 Non-Employee Directors Stock Option Plan
or the 2003 Equity Incentive Plan (the Option
Plans), whether or not then exercisable or vested, shall
be cancelled and, in exchange therefor, each former holder of
any such cancelled Option shall be entitled to receive, in
consideration of the cancellation of such Option and in
settlement therefor, a payment in cash of an amount equal to the
product of (A) the total number of Shares that were subject
to such Option immediately prior to the Effective Time and
(B) the excess, if any, of the Offer Price over the
exercise price per share of such Common Stock that were subject
to such Option, without interest thereon and less any required
tax withholding.
Pursuant to the Merger Agreement, at the Effective Time, all
outstanding shares of restricted stock (other than those with
performance vesting, which will be cancelled at the Effective
Time) granted under equity plans of the Company will immediately
vest and the restrictions associated therewith will
automatically be deemed waived at the Effective Time, and each
such share of restricted stock will be canceled and converted
into the right to receive the Merger Consideration.
The following table shows the amount in cash that each executive
officer and director is expected to receive, based on equity
awards held as of the date of this
Schedule 14D-9,
as a result of the cash-out of all stock options and shares of
restricted stock held by such individual upon the Effective
Time. The amounts in the following table include amounts
attributable to the grants described above made to non-employee
directors in April 2007.
Executive
Officers
|
|
|
|
|
|
|
|
|
Name
|
|
Stock Options
|
|
|
Restricted Shares
|
|
|
Gary W. Rada
|
|
$
|
1,597,620
|
|
|
$
|
16,500
|
|
Timothy J. Benson
|
|
|
67,020
|
|
|
|
61,875
|
|
Timothy F. Gower
|
|
|
764,320
|
|
|
|
11,006
|
|
Michael Perri
|
|
|
319,220
|
|
|
|
52,256
|
|
9
Non-Employee
Directors
|
|
|
|
|
|
|
|
|
Name
|
|
Stock Options
|
|
|
Restricted Shares
|
|
|
Mone Anathan
|
|
$
|
69,050
|
|
|
$
|
0
|
|
Richard E. George
|
|
|
432,600
|
|
|
|
0
|
|
Ben Evans
|
|
|
385,250
|
|
|
|
0
|
|
Peter M. Holmes
|
|
|
343,700
|
|
|
|
0
|
|
Martin G. Mand
|
|
|
357,550
|
|
|
|
0
|
|
Patrick W. OBrien
|
|
|
285,550
|
|
|
|
0
|
|
Robert S. Sandler
|
|
|
378,325
|
|
|
|
0
|
|
Post-Closing
Employee Benefit Arrangements.
The Merger Agreement provides that, subject to certain
exceptions, for a period of two years following the Effective
Time, Parent will provide employee benefit plans, programs,
arrangements and policies for the benefit of employees of the
Company and its subsidiary that, in the aggregate, are no less
favorable to such employees than the Companys employee
benefit plans and arrangements (excluding all equity incentive
plan, programs, agreements and arrangements) in effect
immediately prior to the Effective Time. All service credited to
each employee by the Company or its affiliates through the
Effective Time will be recognized by Parent and its affiliates
for all purposes, including for purposes of eligibility, vesting
and benefit accruals under any employee benefit plan provided by
Parent or its affiliates for the benefit of the employees (other
than with respect to benefit accruals under defined benefit
plans or to the extent necessary to avoid the duplication of
benefits). In addition, Parent will not treat (and will cause
its affiliates not to treat) any such employee as a
new employee for purposes of any pre-existing
condition exclusions, waiting periods, evidence of insurability
requirements or similar provision under any health or other
welfare plan, and will make appropriate arrangements with its
insurance carrier(s), to the extent applicable, to ensure such
result. Continuing employees of the Company will also be
credited for any copayments and deductibles paid prior to the
Effective Time in satisfying any applicable deductible or
out-of-pocket requirements under any welfare benefit plans in
which such employees are eligible to participate after the
Effective Time. Employees do not have third-party beneficiary
rights under the Merger Agreement.
Agreements
with Officers of the Company
As a condition to Parents willingness to enter into the
Merger Agreement, Parent, the Company
and/or
the
Subsidiary entered into agreements with the Companys
officers which will be effective upon consummation of the
Merger. The agreements are summarized in Item 3(a) above
under the captions Amended Employment Agreements;
Agreement with Timothy Benson and Agreements with
Other Non-Executive Officers.
Supply
and Consignment Agreement
The Company and Parent have from time to time engaged in
commercial transactions in the ordinary course of their
respective businesses. On January 26, 2006, Parent entered
into a Primary Supply and Consignment Agreement with the Company
pursuant to which Parent became the Companys exclusive
supplier of solid color paper tableware products. In conjunction
with the agreement, Parent agreed to ship all of Parents
sourced merchandise to the Companys Naperville, Illinois
centralized distribution center and agreed that ownership of the
sourced merchandise would not transfer to the Company until the
goods ship out of the distribution center. Parent had supplied
party merchandise to Factory Card prior to the date of the
agreement. In 2006, Parents sales to Factory Card under
this agreement and based on consignment totaled approximately
$11 million. As of August 2007, sales in 2007 under this
agreement and based on consignment totaled approximately
$7.7 million. This summary of the Primary Supply and
Consignment Agreement does not purport to be complete and is
qualified in its entirety by reference to the Primary Supply and
Consignment Agreement filed as Exhibit (e)(15) hereto which is
incorporated herein by reference.
10
|
|
Item 4.
|
The
Solicitation or Recommendation.
|
(a) Recommendation
of the Board of Directors.
At a meeting of the Company Board held on September 17,
2007, the Company Board unanimously (1) determined that the
Offer, the Merger and the other transactions contemplated by the
Merger Agreement are fair to, and in the best interest of, the
Company and its stockholders; (2) approved the execution,
delivery and performance of the Merger Agreement and the
consummation of the transactions contemplated by the Merger
Agreement, including the Offer and the Merger, and declared its
advisability in accordance with the provisions of the DGCL;
(3) resolved to recommend that the Companys
stockholders tender their Shares in the Offer and, if required
by the DGCL, direct that the Merger Agreement and the Merger be
submitted to the stockholders of the Company for their adoption
and recommend that the stockholders adopt the Merger Agreement
and the Merger; and (4) adopted a resolution rendering the
limitations on business combinations contained in
Section 203 of the DGCL inapplicable to the Offer, the
Merger Agreement and the other transactions contemplated by the
Merger Agreement.
A letter to the Companys stockholders communicating the
recommendation of the Company Board is filed herewith as Exhibit
(a)(1) to this
Schedule 14D-9
and is incorporated herein by reference.
(b) Background
and Reasons for the Company Board of Directors
Recommendation.
Background
of the Offer.
From time to time, the Companys management and the Company
Board have evaluated different strategies for enhancing
stockholder value and enhancing the Companys competitive
position in the party and greeting card industry. At many of the
Companys regularly scheduled Board Meetings, the Company
Board reviewed the Companys short- and long-term business
strategies as well as market trends in the industry and the
challenges confronting the Company in attaining its strategic
objectives. As part of this review, the Company has, from time
to time, considered various strategic alternatives, including
acquisitions, investments and business combinations.
At a meeting of the Company Board held on December 11,
2006, members of management delivered a report to the Company
Board regarding: the Companys stores, products and
industry; the then current financial results; managements
financial projections and managements proposed strategic
direction. A representative of Sonnenschein Nath &
Rosenthal LLP (Sonnenschein) reviewed the Company
Boards legal duties in the consideration of strategic
alternatives. After a lengthy discussion among the directors,
the Company Board determined to evaluate strategic alternatives
to enhance stockholder value and to engage an investment banking
firm to assist management and the Company Board with such
evaluation. On December 12, 2006, the Company announced
that it had initiated an external process to explore strategic
alternatives to enhance stockholder value.
The Company Board reconvened on January 4, 2007 to consider
the engagement of an investment banking firm. After the Company
Board received presentations by several investment banking
firms, the Company Board determined to engage Goldsmith, Agio,
Helms Securities, Inc. (Goldsmith) as the
Companys financial advisor to explore strategic
alternatives, including a possible sale of the Company. The
Company Board decided to retain Goldsmith as the Companys
financial advisor based upon, among other factors, its knowledge
of the industry. The engagement was subject to the negotiation
and execution of an engagement letter, which was executed on
January 22, 2007.
During January through March, 2007, Goldsmith worked with the
Companys management to prepare a confidential information
memorandum and identify a list of potential acquirors. On
April 18, 2007, the Company Board met and reviewed the
confidential information memorandum, the list of potential
acquirors developed by Goldsmith and the terms of the
confidentiality agreement to be used by the Company in
connection with providing information to the interested parties.
After further discussion, the Company Board authorized Goldsmith
and management to begin contacting parties on the list reviewed
at the meeting.
11
In total, 253 potential acquirors were contacted, 203 of which
were financial entities and 50 of which were strategic parties
(including Parent) to gauge their interest in a possible
acquisition of the Company. Each entity was informed that the
Company was evaluating a range of strategic options aimed at
enhancing stockholder value, including a potential sale of the
Company. Each entity also was informed that if it desired to
move forward, it would be required to execute a confidentiality
agreement. Subsequently, during April 2007, 57 of these entities
executed confidentiality agreements with the Company (including
Parent) and received information regarding the Company, its
business operations and management team. Each of the remaining
interested entities, including Parent, was subsequently
requested to submit a preliminary, non-binding acquisition
proposal no later than May 25, 2007.
On May 25, 2007, the Company received a total of four
preliminary, non-binding indications of interest in the possible
acquisition of the Company. The indications of interest ranged
from $8.39 to $16.00 per share, in cash. The indications of
interest included an indication of interest from Parent, which
submitted a preliminary indication of interest for between
$12.50 and $16.00 per share. The Company was also notified by a
group of its vendors that they were working on a proposal to
provide capital to the Company (to be used by the Company to
repurchase Shares) in exchange for new supply agreements with
the vendors.
On June 1, 2007, the Company Board engaged in a telephonic
meeting to review the four preliminary bids that had been
received. The Companys management and legal and financial
advisors also attended the meeting and assisted in the Company
Boards review. The Company Board decided to invite the
three parties with the highest preliminary valuation ranges into
the second round of the process. The Company Board also
determined to permit the vendors to submit a final proposal
relating to a potential leveraged recapitalization.
During the period of June 6, 2007 through the week of
June 18, 2007, management presentations, led by
Messrs. Rada and Benson of the Company, were made to
representatives of the three parties that were invited into the
second round of the process. On June 6, 2007, the Company,
with representatives of Goldsmith present, provided Parent and
representatives with a management presentation. The three
parties were subsequently provided access to a data room to
conduct due diligence on the Company.
On July 2, 2007, final bid procedures were provided to the
three parties and to the group of vendors who were working on a
leveraged recapitalization proposal. Under the bid procedures,
the parties were requested to submit final bids with comments to
the Companys form of merger agreement by July 25,
2007. On July 9, 2007, a draft merger agreement prepared by
Sonnenschein was posted in the data room.
On July 18, 2007, Parents representatives and
financial consultants from Ernst & Young LLP met with
certain members of the Companys finance team. Parent
reviewed the Companys financial systems and reporting
processes, balance sheet reserves and key accounting policies,
gross margins and other operating costs, managements view
of extraordinary expenses, and other general accounting matters.
Prior to the submission of final bids, the Companys
management, at times through Goldsmith, helped answer
outstanding diligence questions of the bidders when information
was not readily available in the data room.
On July 25, 2007, final bids were received from Parent and
one other party. The third potential bidder, a strategic party,
decided not to submit a final bid due to the execution risks in
combining the businesses. In addition, the Company received a
leveraged recapitalization proposal from a group of the
Companys vendors.
The Parent bid reflected a purchase price for the Company of
$15.00 per share and included comments to the Companys
proposed form of merger agreement. The proposal was not subject
to any financing condition but was subject to further due
diligence. In addition, Parent requested an exclusive
three-week
period to conduct due diligence and negotiate a definitive
purchase agreement.
The other bid was from a financial buyer, was at a lower value
and did not include a draft merger agreement. The bid letter
stated that because the bidder was proposing a one-step all cash
merger rather than a two-step transaction as contemplated by the
draft merger agreement supplied by the Company, the bidder did
not feel it was productive at this time to submit a
mark-up
of
the draft merger agreement. The bid did include a memo from the
bidders outside counsel summarizing the principal issues
presented by the draft merger agreement. The bid was subject to
a financing contingency and further due diligence.
12
The proposal from a group of the Companys vendors provided
for approximately $10 million in cash vendor placement
allowances and an additional $3 million of rebates against
future sales. In exchange, the vendors would receive three-year
supply agreements from the Company. The proposal contemplated
that the Company would use the proceeds from the vendor
placement allowances and additional borrowings under the
Companys credit facility to fund a repurchase of the
Companys shares through an issuer tender offer
and/or
stock
buy-back.
On July 24th to 30th, Goldsmith contacted each of the
two final bidders and the representative of the Companys
vendors to clarify their proposals before the Companys
Board meeting on August 1, 2007. On July 31, 2007,
Parent increased its bid to $16.00 per share and, in response to
a request by Goldsmith to the bidders that they mitigate any
financial or regulatory contingencies, added a $4 million
fee payable to the Company in certain circumstances in the event
that the Merger is not consummated due to antitrust laws. Parent
requested a two-week exclusivity period to complete its due
diligence and finalize the Merger Agreement.
A meeting of the Company Board was held on August 1, 2007,
at which representatives of the Companys management and
legal and financial advisors participated. At this meeting,
Goldsmith and Sonnenschein reviewed with the Company Board the
two final bids received, including Parents comments to the
draft merger agreement, the issues relating to the draft merger
agreement identified in the memo of the other bidders
counsel, and the financial and regulatory contingencies of each
bid. The Company Board discussed the likelihood of obtaining an
increase in the price offered by the lower bidder as well as
concerns about the ability of such bidder to meet the process
timetable given that the lower bidder had not submitted its
mark-up
of
the Companys form of merger agreement prior to the date of
the Company Board meeting, as required by the bid instructions.
The Company Board also considered that, although the proposal
from the Companys vendors could allow the Company to
purchase a portion of its outstanding shares at a price near the
bid price offered by Parent, the reduced share base would likely
have an adverse impact on liquidity for remaining stockholders.
In addition, the Company Board considered that the increased
leverage that would be incurred by the Company to consummate the
vendor proposal may reduce the Companys financial
flexibility to grow and pursue other strategic opportunities.
After further discussion, the members of the Companys
Board agreed that the bid price proposed by Parent appeared to
provide substantial value for the Companys stockholders,
particularly in the light of the execution risks in the
Companys industry. The Company Board instructed Goldsmith
to inform Parent that the Company Board would enter into a
limited two-week exclusivity agreement with Parent if Parent
increased its bid price to $17.50 per share.
On August 4, 2007, Parent informed Goldsmith that it would
increase its bid to $16.50 per share if the Company entered into
a two-week exclusivity agreement with Parent. A meeting of the
Company Board was held on August 8, 2007, at which
representatives of the Companys management and legal and
financial advisors participated. Given that Parents bid
was, in view of the Company Board, the highest per share value
and reflected Parents willingness to proceed quickly with
respect to due diligence and negotiation of a definitive
purchase agreement, the Company Board authorized Sonnenschein to
negotiate a limited two-week exclusivity agreement, subject to
certain parameters, with Parents representatives.
On August 8, 2007, the Company entered into an exclusivity
agreement with Parent whereby Parent was granted an exclusive
period, expiring on August 22, 2007, to conduct additional
due diligence in order to confirm its $16.50 per share offer
price. Therefore, at this time, since Parents revised
proposal was conditioned upon grant of this exclusive period,
any discussions with the other bidder and the Companys
vendors were suspended.
From August 8, 2007 through August 15, 2007,
representatives from Sonnenschein and Ropes & Gray LLP
(R&G), Parents outside counsel, continued
negotiating various provisions in the draft merger agreement,
including, among other things, the definition of material
adverse effect, certain representations and warranties,
the non-solicitation provisions, the termination fee and the
provisions relating thereto and the conditions to the completion
of the Offer.
13
On August 15, 2007, the Company Board met to discuss the
status of the transaction. An update on the status of
Parents due diligence efforts was presented to the Company
Board by Goldsmith, and Sonnenschein discussed a variety of
aspects of the negotiations over the terms of the merger
agreement and the status of open issues. In addition, each of
Sonnenschein and special regulatory counsel to the Company,
Arnold & Porter, LLP, reviewed the proposed
transaction with the Company Board from an antitrust
perspective. The Company Board instructed Sonnenschein to
continue to negotiate the merger agreement.
From August 15, 2007 through August 22, 2007,
representatives from Sonnenschein and R&G continued to
negotiate the terms of the merger agreement and Parent and its
advisors continued its due diligence review. During that period,
a number of drafts of the merger agreement and the disclosure
schedules were negotiated and exchanged between the parties, and
substantial progress was made in resolving open issues.
On August 22, 2007, Parent requested an extension of its
exclusivity period until August 31, 2007 to complete its
due diligence and finalize the merger agreement. Parent also
indicated for the first time that it wanted the executive
officers of the Company who had employment agreements to agree
to certain amendments to those agreements prior to execution of
the merger agreement.
On August 22, 2007, a meeting of the Company Board was
convened to discuss the negotiations and Parents request
for an extension of the exclusivity agreement. Sonnenschein
updated the Company Board on the status of the negotiations with
respect to the merger agreement and Parents legal and
financial due diligence. Sonnenschein also informed the Company
Board of Parents request that executive officers agree to
certain amendments to their employment agreements. After a
lengthy discussion among the directors and Sonnenschein, the
Company Board authorized Sonnenschein to negotiate an extension
of the exclusivity agreement through August 29, 2007.
On August 23, 2007, the Company entered into an extension
of the exclusivity agreement with Parent through August 29,
2007. Over the next several days, the parties respective
legal advisors continued to negotiate the terms of the merger
agreement. During the last week of August, Parent also commenced
negotiations with the Companys executive officers, who
were represented by counsel in these negotiations separate from
the Companys counsel, regarding amendments to their
employment agreements to be put in place at the closing of the
Merger.
On August 30, 2007, the Company Board was convened to
discuss the status of the transaction. Sonnenschein updated the
Company Board on the status of negotiations with respect to the
merger. The Company Board also received an update on the
discussions relating to proposed amendments to the employment
agreements of the Companys executive officers. The Company
Board authorized Sonnenschein to continue negotiating the merger
agreement and finalizing the disclosure schedules.
During the next two weeks, management and Parent and their
respective counsel negotiated the terms of executive agreements.
The directors of the Company were periodically updated on the
status of the negotiations.
On September 17, 2007, the Company Board met with the
Companys management and legal and financial advisors to
review the transaction. During the meeting, Sonnenschein
attorneys provided the Company Board with advice on its
fiduciary duties in considering the transaction and reviewed in
detail the proposed terms of the transaction. The Sonnenschein
attorneys also updated the Company Board on changes to the
merger agreement since the previous meeting on August 30,
2007. Drafts of the merger agreement in nearly final form,
together with summaries of the principal terms of the agreement,
which had been distributed to each director prior to the
meeting, were also reviewed.
Counsel discussed, among other things, the structure of the
transaction and the Offer, the terms and conditions of the
Offer, the circumstances for extending the Offer, the
Companys representations, warranties and covenants, the
definition of material adverse effect and its impact
on the rights of the parties in the draft merger agreement, the
ability of the Company to receive, but not to solicit,
alternative proposals for the acquisition of the Company,
termination rights of Parent and the Company, termination fee
provisions for either party in the event the agreement was
terminated under certain circumstances and the conditions to the
proposed Offer and Merger.
14
Goldsmith then reviewed with the Company Board its financial
analysis of the $16.50 per Share consideration and delivered to
the Company Board an oral opinion, which was confirmed by
delivery of a written opinion dated September 17, 2007, to
the effect that, as of that date and based on and subject to
various assumptions, matters considered and limitations
described in its opinion, the $16.50 per Share consideration to
be received in the Offer and the Merger, taken together, by
holders of Shares was fair, from a financial point of view, to
such holders.
Also at this meeting, the Company Board reviewed and approved
certain amendments to the Severance Plan and executive
agreements with the Companys officers, effective upon
consummation of the Merger, as requested by Parent.
After full discussion, the Company Board unanimously
(1) determined that the Offer, the Merger and the other
transactions contemplated by the Merger Agreement are fair to,
and in the best interest of, the Company and its stockholders;
(2) approved the execution, delivery and performance of the
Merger Agreement and the consummation of the transactions
contemplated by the Merger Agreement, including the Offer and
the Merger, and declared its advisability in accordance with the
provisions of the DGCL; (3) resolved to recommend that the
Companys stockholders tender their Shares in the Offer
and, if required by the DGCL, direct that the Merger Agreement
and the Merger be submitted to the stockholders of the Company
for their adoption and recommend that the stockholders adopt the
Merger Agreement and the Merger; and (4) adopted a
resolution rendering the limitations on business combinations
contained in Section 203 of the DGCL inapplicable to the
Offer, the Merger Agreement and the other transactions
contemplated by the Merger Agreement.
The Merger Agreement was executed by the Company, Parent and
Merger Sub the evening of September 17, 2007. At
approximately 7:00 a.m. Eastern time on the morning of
September 18, 2007, Parent and the Company issued a joint
press release announcing the execution of the Merger Agreement.
Reasons
for the Recommendation of the Company Board
In reaching its recommendation described in Section (a) of
this Item 4 regarding the Offer, the Merger and the Merger
Agreement, the Companys Board of Directors considered a
number of factors including the following:
|
|
|
|
|
The Company Operating and Financial Condition; Prospects of
the Company
. The Company Board considered the
current and historical financial condition and results of
operations of the Company, as well as the prospects and
strategic objectives of the Company, including the risks
involved in achieving those objectives, and the current and
expected conditions in the industry in which the Companys
business operates.
|
|
|
|
Strategic Alternatives.
The Company Board
considered trends in the industry in which the Companys
business operates and the strategic alternatives available to
the Company, including remaining an independent public company,
acquisitions of or mergers with other companies in the industry,
leveraged recapitalizations and leveraged buyouts by financial
sponsors or private equity firms, as well as the risks and
uncertainties associated with such alternatives. The Company
Board determined not to pursue other strategic alternatives,
including the leveraged recapitalization proposal by the
Companys vendors, in light of its belief that the Offer
and the Merger maximized stockholder value and represented the
best transaction reasonably available to stockholders.
|
|
|
|
Transaction Financial Terms; Premium to Market
Price.
The Company Board considered the
relationship of the Offer Price and the Merger Consideration to
the historical market prices of the Shares. The Offer Price and
Merger Consideration of $16.50 per Share to be paid in the Offer
and the Merger, respectively, represents (a) a premium of
124.5% over $7.35, the closing price of the Shares on the Nasdaq
Stock Market on September 14, 2007, the last trading day
prior to the execution of the Merger Agreement, (b) a
premium of 28.7% over $12.82, the high share price over the
trailing 52-week period, and (c) a premium of 169.2% over
$6.13, the low share price over the trailing 52-week period.
|
|
|
|
The Process.
The process undertaken on behalf
of the Company to solicit indications of interest in a possible
transaction with the Company, which involved contacting 253
parties to determine their
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15
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potential interest in a business combination transaction with
the Company, entering into confidentiality agreements with 57
parties, and receiving preliminary indications of interest from
four parties and final bids from two parties. The Company Board
believes, based on this process, that is was reasonably unlikely
that a third party would make a more financially attractive
offer, or an offer with as few conditions as Parents offer.
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Timing of Completion.
The Company Board
considered the anticipated timing of consummation of the
transactions contemplated by the Merger Agreement and the
structure of the transaction as a cash tender offer for all of
the Shares, which should allow stockholders to receive the
transaction consideration in a relatively short timeframe,
followed by the Merger in which stockholders would receive the
same consideration as received by stockholders who tender their
Shares in the Offer. The Company Board considered that the
potential for closing in a relatively short timeframe could also
reduce the amount of time in which the Companys business
would be subject to the potential uncertainty of closing and
related disruption.
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Cash Consideration; Certainty of Value.
The
Company Board considered the form of consideration to be paid to
holders of Shares in the Offer and the Merger and the certainty
of the value of such cash consideration compared to stock or
other consideration.
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Conditions to the Consummation of the Offer and the Merger;
Likelihood of Closing.
The Company Board
considered the reasonable likelihood of the consummation of the
transactions contemplated by the Merger Agreement in light of
the limited conditions in the Merger Agreement to the
obligations of Purchaser to accept for payment and pay for the
Shares tendered pursuant to the Offer, including that the
consummation of the Offer and the Merger was not contingent on
Parents ability to secure financing commitments.
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Opinion of the Companys Financial
Advisor.
The Company Board considered the
financial analysis of Goldsmith with respect to the Offer and
the Merger and the oral opinion of Goldsmith which was
subsequently confirmed in writing by delivery of its written
opinion, dated as of September 17, 2007, a copy of which is
attached as Annex I hereto and set forth the procedures
followed, assumptions made, qualifications and limitations on
the review undertaken and other matters considered in connection
with the preparation of its opinion.
The opinion of Goldsmith
was directed to and for the information and use of the
Companys Board of Directors and addressed only the
fairness from a financial point of view as of September 17,
2007, of the consideration to be received by the holders of
Company common stock pursuant to the Merger Agreement. The
opinion does not address any other aspects or implications of
the transaction and does not constitute a recommendation as to
whether the holders of Company common stock should tender their
shares pursuant to the Offer or how such holders should vote or
act on any other matters relating to the Offer or the Merger.
The Company Board was aware that Goldsmith became entitled
to certain fees described in Item 5 upon the rendering of
its opinion and would become entitled to additional fees upon
the consummation of the Offer.
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Ability to Respond to Unsolicited Takeover Proposals and
Terminate the Merger Agreement to Accept a Superior
Proposal.
The Company Board considered the
provisions in the Merger Agreement that provide for the ability
of the Company, subject to the terms and conditions of the
Merger Agreement, to provide information to and engage in
negotiations with third parties that make an unsolicited
proposal, and, subject to payment of a termination fee and the
other conditions set forth in the Merger Agreement, to enter
into a transaction with a party that makes a superior proposal.
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Termination Fee Provisions.
The Company Board
considered the termination fee provisions of the Merger
Agreement and determined that they likely would not be a
significant deterrent to competing offers. The Company Board
considered that the termination fee of $2,000,000 was
approximately 3.2% of the Companys equity value, which the
Company Board believed to be reasonable under the circumstances
and after consideration of the termination fees payable in
comparable transactions.
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16
The Company Board also considered a number of uncertainties and
risks in its deliberations concerning the transactions
contemplated by the Merger Agreement, including the Offer and
Merger, including the following:
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Business Disruption.
The Company Board
considered the likelihood that, following announcement of the
proposed merger transaction, the business of the Company could
be disrupted by a confluence of factors, including the
possibility that: (i) although in many cases the Company
may have contractual rights to maintain such product access, the
suppliers of the products historically sold by the Company may
restrict or no longer provide the Company with access to such
products; and (ii) key employees of the Company may decide
to leave the Company due to uncertainties concerning the
transactions contemplated by the Merger Agreement.
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Termination Fee.
The Company Board considered
the restrictions that the Merger Agreement impose on the
Companys ability to solicit competing bids, and the
insistence of Parent as a condition to entering into the Merger
Agreement that the Company would be obligated to pay a
$2,000,000 termination fee under certain circumstances
(including the potential effect of such termination fee in
deterring other potential acquirers from proposing alternative
transactions).
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Failure to Close.
The Company Board considered
that the conditions to Parents and the Purchasers
obligation to accept for payment and pay for Shares tendered
pursuant to the Offer and to consummate the Merger were subject
to conditions, and the possibility that such conditions may not
be satisfied, including as a result of events outside of the
Companys control. The Company Board considered the fact
that, if the Offer and Merger are not consummated, the business
of the Company may have suffered disruption due to the
vendor/supplier reactions described above under Business
Disruption, the Companys directors, officers and
other employees will have expended extensive time and effort and
will have experienced significant distractions from their work
during the pendency of the transaction, and the Company will
have incurred significant transaction costs attempting to
consummate the transaction. The Company Board also considered
the fact that, if the Offer and Merger are not completed, the
markets perception of the Companys continuing
business could potentially result in a loss of vendors, business
partners and employees and that the trading price of the Shares
could be adversely affected.
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Pre-Closing Covenants.
The Company Board
considered that, under the terms of the Merger Agreement, the
Company would agree to carry on its business in the ordinary
course of business consistent with past practice and, subject to
specified exceptions, that the Company would not take a number
of actions related to the conduct of its business without the
prior written consent of Parent. The Company Board further
considered that these terms may limit the ability of the Company
to pursue business opportunities that it would otherwise pursue.
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Cash Consideration.
The Company Board
considered the fact that, subsequent to completion of the
Merger, the Company would no longer exist as an independent
public company and that the nature of the transaction as a cash
transaction would prevent the Company stockholders from being
able to participate in any value creation that the Surviving
Corporation could generate going forward, as well as any future
appreciation in value of the Surviving Corporation.
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Tax Treatment.
The Company Board considered
the fact that gains from this transaction would be taxable to
the Company stockholders for U.S. federal income tax
purposes.
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Potential Conflicts of Interest.
The Company
Board was aware of the potential conflicts of interest between
the Company, on the one hand, and certain of the Companys
executive officers and directors, on the other hand, as a result
of the transactions contemplated by the Offer and the Merger as
described above in Item 3.
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The Company Board believed that, overall, the potential benefits
of the Offer and the Merger to the Company stockholders outweigh
the risks of the Offer and the Merger and provide the maximum
value to stockholders. In analyzing the Offer and the Merger,
the Company Board and management were assisted and advised by
the Companys financial advisors and legal counsel.
17
The foregoing discussion of information and factors considered
by the Company Board is not intended to be exhaustive. In light
of the variety of factors considered in connection with its
evaluation of the Offer and the Merger, the Company Board did
not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in
reaching its determinations and recommendations. Moreover, each
member of the Company Board applied his own personal business
judgment to the process and may have given different weight to
different factors.
Opinion
of Financial Advisor
Under an engagement letter dated January 22, 2007, the
Company Board retained Goldsmith to render an opinion to the
Board as to the fairness, from a financial point of view, to the
holders of the Shares of the consideration to be paid to such
holders in the Offer and the Merger. On September 17, 2007,
Goldsmith delivered its oral opinion, subsequently confirmed in
writing, to the Board of Directors of the Company that, as of
such date and based upon and subject to the assumptions,
conditions and limitations stated in its opinion, the $16.50 per
Share in cash to be paid to the holders of Shares in the Offer
and the Merger pursuant to the Merger Agreement was fair to such
holders from a financial point of view.
The full text of the Goldsmith opinion, dated
September 17, 2007, is attached as Annex I to this
Schedule 14D-9
and is incorporated into this document by reference. The
description of the Goldsmith opinion set forth in this document
is qualified in its entirety by reference to the full text of
the Goldsmith opinion set forth as Annex I. Stockholders
are urged to read the Goldsmith opinion in its entirety for a
description of the procedures followed, assumptions made,
matters considered and qualifications and limitations on the
review undertaken by Goldsmith in connection with the opinion.
Goldsmiths written opinion was directed to the
Companys Board of Directors and only addressed the
fairness, from a financial point of view, to the holders of the
Shares of the consideration to be paid to such holders in the
Offer and Merger as of the date of the opinion. Goldsmiths
written opinion did not address the relative merits of the Offer
and the Merger as compared to other business strategies or
transactions that might exist for the Company or the underlying
business decision of the Company to engage in the Offer and the
Merger, or the form of the Merger Agreement or the terms
contained therein. The Goldsmith opinion was not intended to and
did not constitute a recommendation to any holder of Shares as
to how such holder should act or vote with respect to the Offer
or Merger or any matter relating thereto. Goldsmith did not
express any opinion as to the price at which Shares might trade
at any time subsequent to the announcement of the Offer or the
Merger. Goldsmiths opinion was necessarily based on
economic, monetary, market and other conditions as in effect on,
and the information made available to Goldsmith as of, the date
of the Goldsmith opinion. Goldsmith assumed no responsibility
for updating or revising its opinion based on circumstances or
events occurring after the date of the opinion. The following is
only a summary of the Goldsmith opinion. You are urged to read
the entire opinion carefully.
In connection with its opinion, Goldsmith:
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reviewed the latest draft of the Merger Agreement;
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reviewed certain financial and other information that was
publicly available relating to the Company and the industry in
which it operates;
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reviewed certain internal financial forecasts and other data of
the Company that was made available to Goldsmith by the Company;
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discussed with management of the Company the past and present
financial condition, operating results, business outlook, and
prospects of the Company;
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reviewed the historical stock prices and trading volumes of the
Company common stock;
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reviewed public information with respect to certain other
companies in lines of business that Goldsmith deemed generally
comparable to the business of the Company;
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18
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reviewed the financial terms of certain business transactions
involving companies in lines of business that Goldsmith deemed
generally comparable to the business of the Company and in other
industries generally; and
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conducted such other financial studies, analyses and
investigations as Goldsmith deemed appropriate.
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Goldsmith relied upon and assumed, without independent
verification, the accuracy and completeness of the financial and
other information furnished by, or publicly available relating
to, the Company or otherwise made available to Goldsmith.
Goldsmith did not assume responsibility to independently verify
such information. With respect to financial forecasts and
projections, Goldsmith assumed that such information was
prepared on bases reflecting the best currently available
estimates and judgments of the management of the Company as to
the future financial performance of the Company, and that the
Company was not aware of any information or fact that would make
the information provided to Goldsmith incomplete or misleading.
Goldsmith assumed no responsibility for, and expressed no view
as to, such financial forecasts or projections or the
assumptions on which they were based.
In rendering its opinion, Goldsmith assumed that the executed
version of the Merger Agreement would not differ in any material
respect from the latest draft that Goldsmith reviewed. Goldsmith
also assumed that the Company and the other parties to the
Merger Agreement would perform all of the covenants and
agreements to be performed under the Merger Agreement, and that
the conditions to the Offer and the Merger set forth in the
Merger Agreement would be satisfied and the Offer and the Merger
would be consummated on a timely basis in the manner
contemplated by the Merger Agreement, without any waiver or
modification of any material terms or conditions of the Merger
Agreement by the Company. In addition, Goldsmith relied upon and
assumed, without independent verification, the accuracy of the
representations and warranties contained in the Merger
Agreement. Goldsmith assumed that all material governmental,
regulatory, or other consents and approvals necessary for
consummation of the Offer and the Merger would be obtained
without any adverse effect on the Offer, the Merger, the Company
or its stockholders. Goldsmith did not express any opinion on
any legal, tax, accounting, governmental, or regulatory matters
and assumed the accuracy and completeness of all legal, tax,
accounting, governmental, or regulatory advice received by the
Company related to the Offer and the Merger.
In arriving at its opinion, Goldsmith did not perform any
appraisals or valuations of specific assets or liabilities of
the Company, nor was Goldsmith furnished with any such
appraisals or valuations. Goldsmith did not give any advice to
the Board of Directors of the Company regarding, and its opinion
did not address, any issues of solvency or fair value of the
Company. Goldsmith did not have or undertake any obligations to
update, revise, or reaffirm its opinion.
The following is a brief summary of the material financial and
comparative analyses that Goldsmith deemed appropriate for this
type of transaction and that were performed by Goldsmith in
connection with rendering its opinion. The summary of
Goldsmiths analyses described below is not a complete
description of the analyses underlying Goldsmiths opinion.
The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances,
and, therefore, is not readily susceptible to summary
description. In arriving at its opinion, Goldsmith considered
the results of all the analyses and did not attribute any
particular weight to any factor or analysis considered by it;
rather, Goldsmith made its determination as to fairness on the
basis of its experience and professional judgment after
considering the results of all the analyses. For purposes of
Goldsmiths review, Goldsmith utilized, among other things,
certain projections of the future financial performance of the
Company as described below, as prepared by the Companys
management.
In its analyses, Goldsmith considered industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the
Company. No company, transaction or business used in
Goldsmiths analyses as a comparison is identical to the
Company or the proposed merger, and an evaluation of the results
of those analyses is not entirely mathematical. Rather, the
analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that
could affect the acquisition, public trading or other values of
the companies or transactions
19
analyzed. The estimates contained in Goldsmiths analyses
and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be
significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually
may be sold. Accordingly, the estimates used in, and the results
derived from, Goldsmiths analyses are inherently subject
to substantial uncertainty.
The financial analyses summarized below include information
presented in tabular format. In order to fully understand
Goldsmiths financial analyses, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Considering the data in the tables below without considering the
full narrative description of the financial analyses, including
the methodologies and assumptions underling the analyses, could
create a misleading or incomplete view of Goldsmiths
financial analyses.
Discounted
Cash Flow Analysis
Based on the projections and guidance provided to Goldsmith by
Company management, Goldsmith performed a discounted cash flow
analysis of the Company to calculate the estimated present value
of the standalone, unlevered, after-tax cash flows that the
Company could generate during fiscal years ending on or about
January 31, 2008 through 2012. Goldsmith calculated
estimated terminal values for the Company by applying a range of
EBITDA terminal value multiples of 6.0x to 7.5x to the
Companys fiscal year ended January 31, 2012 estimated
EBITDA. The unlevered, after-tax free cash flows and terminal
values were discounted to present value using discount rates
ranging from 15.5% to 19.5%, which were based on the estimated
weighted average cost of capital of selected peer companies that
Goldsmith viewed as reasonably comparable to the Company. The
Company estimated its net debt as of August 4, 2007 at
$7.2 million. Based on the foregoing, Goldsmith calculated
an implied price per share range for the Companys common
stock that is set forth in the following table:
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Implied Value per Share
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Discounted Cash Flow Assumptions
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of the Company
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Terminal EBITDA Multiples of 6.0x
to 7.5x
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$
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15.25 to $18.52
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Discount rates from 15.5% to
19.5%
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Goldsmith noted that the per Share consideration in the Offer
and Merger was within this range.
Comparable
Public Companies Analysis
Goldsmith reviewed and analyzed selected public companies
engaged in business activities that Goldsmith viewed as
reasonably comparable to the Companys business. In
performing these analyses, Goldsmith reviewed and analyzed
certain financial information, implied multiples and market
trading data relating to the selected comparable companies and
compared such information to the corresponding information for
the Company. Specifically, Goldsmith compared the Company to the
following six publicly traded companies:
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AC Moore Arts & Crafts Inc.;
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American Greetings Corp.;
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Celebrate Express Inc.;
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Hancock Fabrics Inc.;
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iParty Corp.; and
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Jo-Ann Stores.
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As part of its comparable public company analysis, Goldsmith
analyzed for each of the Company and the comparable companies
the ratios of enterprise value, defined as market capitalization
plus total debt less cash and cash equivalents, to
(i) revenues, (ii) earnings before interest, taxes,
depreciation, and amortization, or EBITDA, (iii) earnings
before interest and taxes, or EBIT, and (iv) total assets.
Goldsmith also analyzed the
20
ratios of equity value, defined as share price multiplied by
shares outstanding, to (i) net income and (ii) owners
equity. These multiples were calculated for the following
periods:
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the
12-months
ended with the most recently reported quarter,
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the most recent fiscal year,
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the three-year period ended with the most recent fiscal
year, and
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the projected
12-month
period ending with the current fiscal year (based on estimates
of Company management, in the case of the Company, and industry
analysts, in all other cases).
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Based on the analysis of the relevant metrics and qualitative
characteristics of the Company compared to each of the
comparable companies, Goldsmith selected representative ranges
of financial multiples of the comparable companies and applied
these ranges of multiples to the relevant Company financial
statistics. Based on the Companys outstanding common
stock, options, and warrants as of August 4, 2007,
Goldsmith calculated the estimated implied value per share of
the shares as of September 14, 2007:
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Implied Value per Share
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Financial Statistic
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of the Company
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Revenues, EBIT, EBITDA, Net Income,
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$
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10.22 to $12.18
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Total Assets, and Owners Equity
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Goldsmith noted that the per Share consideration in the Offer
and Merger exceeded this range.
Goldsmith selected the comparable companies because their size,
business, and operating profiles are reasonably similar to that
of the Company. Because of the inherent differences between the
business, operations, and prospects of the Company and the
businesses, operations, and prospects of the selected comparable
companies, however, no comparable company is exactly the same as
the Company. Therefore, Goldsmith believed that it was
inappropriate to, and therefore did not, rely solely on the
quantitative results of the comparable public company analysis.
Accordingly, Goldsmith also made qualitative judgments
concerning differences between the financial and operating
characteristics and prospects of the Company and the companies
included in the comparable public company analysis that would
affect the public trading values of each in order to provide a
context in which to consider the results of the quantitative
analysis. These qualitative judgments related primarily to the
differing sizes, growth prospects, profitability levels,
business scalability, and degree of operational risk between the
Company and the companies included in the comparable public
company analysis.
Precedent
Transactions Analysis
Using publicly available information, Goldsmith reviewed and
compared the purchase prices and financial multiples paid in 16
acquisitions of businesses in the gift, novelty and souvenir
shops industry. In performing this analysis, Goldsmith
recognized that the merger and acquisition transaction
environment varies over time because of, among other things,
interest rate and equity market fluctuations and industry
results and growth expectations. Likewise, valuations and their
implied multiples will vary over time and market conditions. No
acquired company or business used in the precedent transactions
analysis is identical or substantially identical to the Company.
Goldsmith chose the transactions used in the precedent
transaction analysis based on the similarity of the target
companies in the transactions to the Company in terms of size,
business operations, and other characteristics of their
businesses.
21
Goldsmith analyzed the acquisition of the selected publicly
traded and privately held businesses and calculated the
enterprise value implied in the acquisition as a multiple of the
acquired companys revenue, EBIT, and EBITDA as well as the
price paid as a multiple of earnings of the acquired company, in
each case over selected time periods. Multiples derived from
these transactions were then applied to the Companys
financial results for comparable time periods. Goldsmith
reviewed the following transactions occurring between
July 9, 2002 and June 26, 2007:
Selected
Precedent Transactions (Target/Acquirer)
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Date Closed
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Acquirer
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Target
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06/26/07
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Productos Pelikan
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Pelikan Argentina S.A.
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10/11/06
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Shareholder Group
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Notos Com Holdings SA
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09/29/06
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Gordon Brothers Group
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Luxottica Group SpA
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09/19/06
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Tiimari Plc
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Tiimari Oyj
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09/26/05
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Amscan Holdings Inc.
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Party City Corp.
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05/27/05
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International Greetings Plc
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Anker International Plc
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05/16/05
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Hibernation Holdings
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The Vermont Teddy Bear
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11/18/04
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Clinton Cards Plc
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Birthdays Ltd.
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08/05/04
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The Childrens Place
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The Walt Disney Co.
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05/11/04
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Lyreco International
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National 1 Ltd.
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09/02/03
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The Birthdays Group Ltd.
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Birthdays Ltd.
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06/19/03
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Bed Bath & Beyond
Inc.
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Christmas Tree Shops, Inc.
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05/29/03
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Phoenix Group of Florida,
Inc.
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BCT International Inc.
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04/07/03
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Office Depot, Inc.
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Guilbert S.A.
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03/10/03
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Blyth Inc.
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Miles Kimball Company
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07/09/02
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American Achievement
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Milestone Traditions
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Goldsmith applied multiples derived from the precedent
transactions to the Companys financial results. The
following table summarizes Goldsmiths analysis:
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Implied Value per Share of the
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Financial Statistic
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Company
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Revenues, EBIT, EBITDA, and Net
Income
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$
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11.68 to 16.54
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Goldsmith noted that the per Share consideration in the Offer
and Merger was at the upper end of this range.
Other
Analyses
Market
Review
Goldsmith reviewed Share price and volume data for the
Companys common stock for the approximately four-year
period from July 2003 to September 14, 2007, and observed
that, during this period, the closing Share price of Company
common stock ranged from $5.70 per Share to $22.68 per Share.
Goldsmith observed that, during the twelve months preceding
September 14, 2007, the trading price of Company common
stock ranged from $6.13 to $12.82. Goldsmith noted that the per
Share consideration in the Offer and Merger exceeded this range.
Premiums
Paid Analysis
Goldsmith performed a premiums paid analysis based upon the
premiums paid in nine selected precedent transactions involving
acquisitions of U.S. public companies, with transaction
consideration consisting exclusively of cash in amounts ranging
from $3 million to $5.6 billion. All of the
transactions were announced on or after January 1, 2001.
22
The analysis was based on the
one-day,
five-days
and
thirty-days
implied premiums paid in the selected precedent transactions.
Goldsmith calculated the implied premium paid in each
transaction by comparing the per share offer price at the time
of the announcement of each transaction to the target
companys stock price one day, five days, and thirty days
prior to the announcement of the transaction.
Based upon the foregoing, Goldsmith selected the median of the
range of premiums for each time period, which was 29% for one
day, 32.6% per five days and 21.5% for thirty days, and applied
the premiums to the closing price of Company common stock as of
one day, five days and thirty days prior to September 14,
2007, the last day of trading prior to the date of
Goldsmiths written opinion. Based on the foregoing,
Goldsmith calculated a range of implied per share prices for the
Companys common stock from $8.94 to $9.40. Goldsmith noted
that the per Share consideration in the Offer and Merger
exceeded this range.
Miscellaneous
Goldsmiths opinion was one of the many factors taken into
consideration by the Company Board in making its determination
to approve the Merger Agreement. Goldsmiths analyses
summarized above should not be viewed as determinative of the
opinion of the Board with respect to the value of the Company or
of whether the Board would have been willing to agree to a
different offer or form of consideration.
Goldsmith is an internationally recognized investment banking
firm and, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, private
placements, restructurings, and valuations for corporate and
other purposes. The Company Board selected Goldsmith because of
its expertise, reputation, and familiarity with the Company and
because its investment banking professionals have substantial
experience in transactions comparable to the Offer and the
Merger. Pursuant to an engagement agreement dated
January 22, 2007, the Company paid Goldsmith a fee of
$125,000 for delivery of its fairness opinion, which fee was not
contingent on the conclusions reached in such opinion or the
consummation of the Offer or the Merger. In addition, the
Company has agreed to reimburse Goldsmith for its out-of-pocket
expenses incurred in connection with providing its fairness
opinion and to indemnify Goldsmith and certain affiliated
parties against certain liabilities, including liabilities under
federal securities laws, arising out of or in connection with
the services rendered by Goldsmith. Goldsmith was also engaged
to provide other financial advisory services to the Company in
connection with the Offer and the Merger and will receive
additional fees, a significant portion of which are contingent
upon consummation of the Offer and the Merger. Goldsmith
and/or
its
affiliates may have from time to time in the past provided, and
may currently or in the future provide, investment banking
services to the Company and Parent or their respective
affiliates for which Goldsmith or its affiliates have received
or may receive customary fees. In addition, in the ordinary
course of their respective businesses, Goldsmiths
affiliates, including Lazard Freres & Co. LLC, and
LFCM Holdings LLC (an entity indirectly owned in large part by
managing directors of Lazard Freres & Co.
LLC) may actively trade in securities of the Company for
their own accounts and for the accounts of their customers and,
accordingly, may at any time hold a long or a short position in
such securities.
(c) Intent
to Tender.
To the knowledge of the Company, after making reasonable
inquiry, each of the members of the Company Board, and each of
the executive officers of the Company intend to (1) tender
in the Offer the Shares that are held of record or beneficially
by each such person, and (2) if necessary, each such person
intends to vote the Shares that are held of record or
beneficially by each such person in favor of the Merger. The
foregoing does not include any Shares over which, or with
respect to which, any such executive officer, director or
affiliate acts in a fiduciary or representative capacity or is
subject to the instructions of a third party with respect to
such tender.
23
|
|
Item 5.
|
Person/Assets,
Retained, Employed, Compensated or Used.
|
The Company retained Goldsmith as its financial advisor in
connection with the Offer and the Merger (together, the
Transaction). Pursuant to an engagement letter dated
January 22, 2007, the Company became obligated to pay
Goldsmith a fee of $150,000 for consulting services and an
additional fee of $125,000 upon the delivery of Goldsmiths
financial opinion attached as Annex I hereto. The fee to be
paid for provision of the fairness opinion is not contingent on
the consummation of the Offer or the Merger. Pursuant to the
engagement letter, the Company will become obligated to pay
Goldsmith an additional fee upon the closing of the Offer equal
to $850,000 plus, if applicable, a specified percentage of the
Total Consideration (as defined in the engagement letter) of the
Transaction in excess of $55 million. Based on the Offer
Price, the Company currently estimates the total amount of such
accomplishment fee to be approximately $1,500,000. In addition,
the Company agreed to reimburse Goldsmiths expenses and to
indemnify them and certain related parties against certain
liabilities arising out of their engagement, including
liabilities under the federal securities laws.
Goldsmith is an internationally recognized investment banking
firm and, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, private
placements, restructurings, and valuations for corporate and
other purposes. In addition, in the ordinary course of their
respective businesses, Goldsmiths affiliates, including
Lazard Freres & Co. LLC, and LFCM Holdings LLC (an
entity indirectly owned in large part by managing directors of
Lazard Freres & Co. LLC) may actively trade in
securities of the Company for their own accounts and for the
accounts of their customers and, accordingly, may at any time
hold a long or a short position in such securities.
The opinion of Goldsmith is attached as Annex I hereto, and
sets forth therein the procedures followed, assumptions made,
qualifications and limitations on the review undertaken and
other matters considered in connection with the preparation of
its opinion. The Company encourages holders of Shares to read
the opinion carefully. The opinion does not address any other
aspects or implications of the Transaction and does not
constitute a recommendation as to whether the holders of Shares
should tender their Shares pursuant to the Offer or how such
holders should vote or act on any other matters relating to the
Offer or the Merger. The Company selected Goldsmith to act as
its financial advisor in connection with the proposed
Transaction based on its qualifications, experience, reputations
and knowledge of the business affairs of the Company and the
industry in which it participates.
Except as set forth above, neither the Company nor any person
acting on its behalf has employed, retained or compensated any
other person to make solicitations or recommendations to the
Companys stockholders on its behalf concerning the Offer
or the Merger, except that such solicitations or recommendations
may be made by directors, officers or employees of the Company,
for which services no additional compensation will be paid.
|
|
Item 6.
|
Interest
in Securities of the Subject Company.
|
No transactions in the Shares have been effected during the past
60 days by the Company, or, to the Companys
knowledge, any of the Companys directors, executive
officers, affiliates or subsidiaries other than in the ordinary
course of business in connection with the Companys
employee benefit plans.
|
|
Item 7.
|
Purposes
of the Transaction and Plans or Proposals.
|
Except as indicated in Items 2, 3 and 4 of this
Schedule 14D-9,
(a) the Company is not undertaking or engaged in any
negotiations in response to the Offer that relate to, or would
result in: (i) a tender offer for or other acquisition of
the Companys securities by the Company, any of its
subsidiaries, or any other person; (ii) any extraordinary
transaction such as a merger, reorganization or liquidation,
involving the Company or any of its subsidiaries; (iii) any
purchase, sale or transfer of a material amount of assets of the
Company or any of its subsidiaries; or (iv) any material
change in the present dividend rates or policy, or indebtedness
or capitalization of the Company, and (b) there are no
transactions, board resolutions or agreements in principle
or signed contracts in response to the Offer that relate to, or
would result in, one or more of the events referred to in
clause (a) of this Item 7.
24
|
|
Item 8.
|
Additional
Information.
|
No appraisal rights are available in connection with the Offer.
However, if the Offer is successful and the Merger is
consummated, holders of Shares who have not properly tendered in
the Offer and have neither voted in favor of the Merger nor
consented thereto in writing, and who otherwise comply with the
applicable procedures under DGCL Section 262, will be
entitled to receive appraisal rights for the fair
value of their shares as determined by the Delaware Court
of Chancery (exclusive of any element of value arising from the
accomplishment or expectation of such Merger or similar business
combination) and to receive payment of such fair value in cash,
together with a fair rate of interest, if any, for Shares held
by such holder. Any such judicial determination of the fair
value of the Shares could be based upon considerations other
than or in addition to the price paid in the Offer and the
market value of the Shares. Stockholders should recognize that
the value so determined could be higher or lower than the price
per Share paid pursuant to the Offer. Moreover, the Company may
argue in an appraisal proceeding that, for purposes of such a
proceeding, the fair value of the Shares is less than the price
paid in the Offer. Any stockholder contemplating the exercise of
such appraisal rights should review carefully the provisions of
DGCL Section 262, particularly the procedural steps
required to perfect such rights.
The obligations of the Company to notify stockholders of their
appraisal rights will depend on how the Merger is effected. If a
meeting of the Companys stockholders is held to approve
the Merger, the Company will be required to send a notice to
each stockholder of record not less than 20 days prior to
the Merger that appraisal rights are available, together with a
copy of Section 262. Within 10 days after the closing
of the Merger, the Surviving Corporation will be required to
send a notice that the Merger has become effective to each
stockholder who delivered to the Company a demand for appraisal
prior to the vote and who did not vote in favor of the Merger.
Alternatively, if the Merger is consummated through a short-form
procedure, the Surviving Corporation will be required to send a
notice within 10 days after the date the Merger has become
effective to each stockholder of record on the effective date of
the Merger. The notice will inform stockholders of the effective
date of the Merger and of the availability of, and procedure for
demanding, appraisal rights, and will include a copy of
Section 262.
Failure to follow the steps required by
DGCL Section 262 for perfecting appraisal rights may result
in the loss of such rights.
The foregoing summary of
appraisal rights under DGCL is not complete and is qualified in
its entirety by reference to DGCL Section 262 and the Offer.
Appraisal rights cannot be exercised at this time. The
information set forth above is for informational purposes only
with respect to alternatives available to stockholders if the
Merger is completed. Stockholders who will be entitled to
appraisal rights in connection with the Merger will receive
additional information concerning appraisal rights and the
procedures to be followed in connection therewith before such
stockholders have to take any action relating
thereto
.
Stockholders who sell shares in the Offer will not be entitled
to exercise appraisal rights with respect thereto but, rather,
will receive the Offer Price.
|
|
(b)
|
Anti-takeover
Statute.
|
As a Delaware corporation, the Company is subject to
Section 203 of the DGCL (Section 203). In
general, Section 203 would prevent an interested
stockholder (generally defined as a person beneficially
owning 15% or more of a corporations voting stock) from
engaging in a business combination (as defined in
Section 203) with a Delaware corporation for three
years following the date such person became an interested
stockholder unless: (i) before such person became an
interested stockholder, the board of directors of the
corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the
business combination, (ii) upon consummation of the
transaction which resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for
purposes of determining the number of shares of outstanding
stock held by directors who are also officers and by employee
stock plans that do not allow plan participants to determine
confidentially whether to tender shares), or
(iii) following the transaction in which such person became
an interested stockholder, the business
25
combination is (x) approved by the board of directors of
the corporation and (y) authorized at a meeting of
stockholders by the affirmative vote of the holders of at least
66
2
/
3
%
of the outstanding voting stock of the corporation not owned by
the interested stockholder. In accordance with the provisions of
Section 203, the Companys Board of Directors has
approved the Merger Agreement, as described in Item 4 above
and, therefore, the restrictions of Section 203 are
inapplicable to the Merger and the transactions contemplated
under the Merger Agreement.
|
|
(c)
|
Regulatory
Approvals.
|
Under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR
Act) and the rules that have been promulgated thereunder
by the Federal Trade Commission (the FTC), certain
acquisition transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the
Department of Justice (the Antitrust Division) and
the FTC and certain waiting period requirements have been
satisfied. Based upon the calculation of the value by Purchaser
of the Companys voting securities as determined under the
HSR Act, the Company believes that notice under the HSR Act is
not required for this transaction. Should any such notice or
other action be required, the Company currently contemplates
proceeding as required.
The Antitrust Division and the FTC are the agencies in charge of
reviewing, for antitrust purposes, transactions such as the
acquisition of Shares by Purchaser pursuant to the Offer. At any
time before or after the consummation of any such transactions,
including the acquisition of Shares by Purchaser pursuant to the
Offer, the Antitrust Division or the FTC could take such action
under the antitrust laws of the United States as it deems
necessary or desirable in the public interest, including seeking
to enjoin the purchase of Shares pursuant to the Offer or
seeking divestiture of the Shares so acquired or divestiture of
substantial assets of Parent or the Company. Private parties
(including individual States of the United States) may also
bring legal actions under the antitrust laws of the United
States. The Company does not believe that the consummation of
the Offer will result in a violation of any applicable antitrust
laws. However, there can be no assurance that a challenge to the
Offer on antitrust grounds will not be made, or if such a
challenge is made, what the result would be.
The Company is not aware of any other filings, approvals or
other actions by or with any governmental authority or
administrative or regulatory agency Act that would be required
for Parents or Purchasers acquisition or ownership
of the Shares.
|
|
(d)
|
Vote
Required to Approve the Merger.
|
The Company Board has approved the Offer, the Merger and the
Merger Agreement in accordance with the DGCL. Under
Section 253 of the DGCL, if Purchaser acquires, pursuant to
the Offer or otherwise, at least 90% of the outstanding Shares,
Purchaser will be able to effect the Merger after consummation
of the Offer without a vote by the Companys stockholders.
If Purchaser acquires, pursuant to the Offer or otherwise, less
than 90% of the outstanding Shares, the affirmative vote of the
holders of a majority of the outstanding Shares will be required
under the DGCL to effect the Merger. In the event the minimum
tender condition required to be met under the Merger Agreement
has been satisfied, after the purchase of the Shares by
Purchaser pursuant to the Offer, Purchaser will own a majority
of the outstanding Shares and be able to effect the Merger
without the affirmative vote of any other stockholder of the
Company.
(e) Top-Up
Option.
Pursuant to the terms of the Merger Agreement, the Company
granted the Purchaser an irrevocable option, exercisable only on
the terms and conditions set forth in the Merger Agreement, to
purchase, at a price per Share equal to the Offer Price, newly
issued Shares of the Companys common stock in an amount up
to the lowest number of Shares that, when added to the number of
Shares then owned by Parent, Purchaser or any subsidiaries or
affiliates of Parent or Purchaser, constitutes one Share more
than 90% of the Shares outstanding after the issuance of the new
Shares sold to the Purchaser, provided that this option shall
not be exercisable for a number of Shares in excess of the
Shares authorized and unissued at the time of the exercise
26
of the option. This option is exercisable only if
(i) Purchaser acquired at least 85% of the outstanding
Shares pursuant to the Offer or a subsequent offering period,
and (ii) the stock issuance would not require the approval
of the Companys stockholders under applicable regulations.
The foregoing summary is qualified in its entirety by reference
to the Merger Agreement, which is filed as Exhibit (e)(1) hereto
and is incorporated herein by reference.
|
|
(f)
|
Section 14(f)
Information Statement.
|
The Merger Agreement provides that promptly upon the purchase of
and payment for any Shares by Parent or Purchaser pursuant to
the Offer (provided the Shares so purchased represent at least a
majority of the Shares issued and outstanding on a fully diluted
basis), Parent will be entitled to designate such number of
directors, rounded to the nearest whole number, on the Board as
is equal to the product of the total number of directors on the
Board (giving effect to the directors so designated by Parent
and the provisions of the Merger Agreement) multiplied by the
percentage that the number of Shares so accepted for payment
bears to the total number of Shares then issued and outstanding
on a fully diluted basis. The Company shall, upon Parent or
Purchasers request, use all reasonable efforts promptly
either to increase the size of the Board or to secure the
resignations of such number of its incumbent directors, or both,
as is necessary to enable Parents designees to be so
elected to the Board, and shall take all actions available to
the Company to cause Parents designees to be so elected.
At such time, and subject to the provisions described below with
respect to the composition of the Audit Committee prior to the
Effective Time, the Company shall also cause persons designated
by Parent to have appropriate representation on (i) each
committee of the Board, (ii) each board of directors (or
similar body) of each subsidiary and (iii) each committee
(or similar body) of each such board. The Company is required to
promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and
Rule 14f-1
promulgated thereunder.
The Merger Agreement also provides that, in the event that
Parents designees are elected to the Board, until the
Effective Time (as defined in the Merger Agreement), the Board
shall have at least three directors who are directors on the
date of the Merger Agreement and who are not officers of the
Company (the Original Directors) and at least three
Original Directors shall serve on the Audit Committee of the
Board such that the Audit Committee complies with all applicable
requirements of the SEC and the Nasdaq Stock Market
(collectively, the Audit Committee Requirements);
provided that, in such event, if the number of Original
Directors is reduced below three for any reason whatsoever, any
remaining Original Directors (or Original Director, if there be
only one remaining) shall be entitled to designate persons (who
shall not be officers or affiliates of the Company) to fill such
vacancies who shall be deemed to be Original Directors for
purposes of the Merger Agreement or, if no Original Director
then remains, the other directors shall designate three persons
(who shall not be officers or affiliates of the Company) to fill
such vacancies who shall not be stockholders, affiliates or
associates of Parent or Purchaser, and such persons shall be
deemed to be Original Directors for purposes of the Merger
Agreement. If Parents designees are elected to the Board
before the Effective Time, the affirmative vote of a majority of
the Original Directors shall be required for the Company to
(a) amend or terminate the Merger Agreement or agree or
consent to any amendment or termination of the Merger Agreement,
(b) exercise or waive any of the Companys rights, benefits
or remedies under the Merger Agreement, or (c) take any
other action by the Board under or in connection with the Merger
Agreement.
Attached hereto as Annex II is the requisite Information
Statement pursuant to Section 14(f) of the Exchange Act and
Rule 14f-1
thereunder furnished in connection with the possible election of
persons designated by Parent, pursuant to the Merger Agreement,
to a majority of the seats on the Companys Board of
Directors, other than at a meeting of the Companys
stockholders.
Upon request, the Company made available to potential acquirors
that signed confidentiality agreements, including Parent,
certain non-public business and financial information about the
Company, including certain financial projections. The
projections provided to potential acquirors as part of the
management presentation included the following pro forma
estimates of the Companys future financial performance:
(i) for the fiscal year ending February 2, 2008, net
sales of $240.0 million, gross profit of $90.1 million
and EBITDA of
27
$7.4 million and (ii) for the fiscal year ended
January 31, 2009, net sales of $251.1 million, gross
profit of $95.6 million and EBITDA of $8.9 million.
The Companys non-public business and financial information
and projections that the Company provided to Parent during the
course of Parents due diligence investigation of the
Company were provided solely in connection with such due
diligence investigation and not expressly for inclusion or
incorporation by reference in any Offer documents. There is no
guarantee that any projections will be realized, or that the
assumptions on which they are based will prove to be correct.
The Company does not as a matter of course make public any
projections as to future performance or earnings beyond limited
guidance for periods no longer than one year, and the
projections set forth above are included in this
Schedule 14D-9
only because this information was provided to Parent and its
advisors. The projections were not prepared with a view to
public disclosure or compliance with the published guidelines of
the SEC or the guidelines established by the American Institute
of Certified Public Accountants regarding projections or
forecasts. The projections do not purport to present operations
in accordance with U.S. generally accepted accounting
principles, and the Companys independent auditors have not
examined, compiled or otherwise applied procedures to the
projections and accordingly assume no responsibility for them.
The Companys internal financial forecasts (upon which the
projections were based in part) are, in general, prepared solely
for internal use such as budgeting, and other management
decisions and are subjective in many respects and thus
susceptible to interpretations and periodic revision based on
actual experience and business developments. The projections
reflect numerous assumptions made by the management of the
Company, including those listed above, and general business,
economic, market and financial conditions and other matters, all
of which are difficult to predict and many of which are beyond
the Companys control. Accordingly, there can be no
assurance that the assumptions made in preparing the projections
will prove reflective of actual events or that any of the
projections will be realized.
The Company expects that there will be differences between
actual and projected results, and actual results may be
materially greater or less than those contained in the
projections due to numerous risks and uncertainties, including
but not limited to the risk that the Company will face increased
competition from larger companies with greater resources; the
risk that the Company will not be able to successfully execute
its long-term strategy; and the other risks and uncertainties
described in reports filed by the Company with the SEC under the
Exchange Act, including without limitation under the heading
Risk Factors in the Companys Annual Report on
Form 10-K
for the fiscal year ended February 3, 2007 and subsequent
periodic reports filed with the SEC. All projections are
forward-looking statements; these and other forward-looking
statements are expressly qualified in their entirety by the
risks and uncertainties identified above and the cautionary
statements contained in the Companys
Form 10-K
and subsequent periodic reports filed with the SEC.
The inclusion of the projections herein should not be regarded
as an indication that any of the Company representatives
consider the projections to be a prediction of actual future
events, and the projections should not be relied upon as such.
Except as required by law, none of the Company or Parent intends
to update or otherwise revise the projections to reflect
circumstances existing after the date such projections were
generated or to reflect the occurrence of future events even in
the event that any or all of the assumptions underlying the
projections are shown to be in error.
The Companys stockholders are cautioned not to place undue
reliance on the projections included in this
Schedule 14D-9.
The following Exhibits are filed with this
Schedule 14D-9:
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|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
(a)(1)
|
|
|
Letter to Stockholders of the
Company, dated October 1, 2007, from Gary W. Rada,
President and Chief Executive Officer of the Company.+*
|
|
(a)(2)
|
|
|
Offer to Purchase, dated
October 1, 2007 (incorporated by reference to
Exhibit(a)(1)(A) to the Schedule TO of Parent and Purchaser
filed with the Securities and Exchange Commission on
October 1, 2007).*
|
28
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
(a)(3)
|
|
|
Form of Letter of Transmittal
(incorporated by reference to Exhibit(a)(1)(B) to the
Schedule TO of Parent and Purchaser filed with the
Securities and Exchange Commission on October 1, 2007).*
|
|
(a)(4)
|
|
|
Opinion of Goldsmith Agio Helms,
dated September 17, 2007 (included as Annex I to this
Schedule 14D-9).*
|
|
(a)(5)
|
|
|
Joint Press Release issued by the
Company and Parent, dated September 18, 2007 (incorporated
by reference to Exhibit 99.1 to the Companys Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 18, 2007).
|
|
(a)(6)
|
|
|
Summary Advertisement as published
in The Wall Street Journal on October 1, 2007 (incorporated
by reference to Exhibit(a)(5)(B) to the Schedule TO of
Parent and Purchaser filed with the Securities and Exchange
Commission on October 1, 2007).
|
|
(a)(7)
|
|
|
Notice of Merger and Related
Adjustment dated October 1, 2007 delivered to
Series B, Series C and Series D Warrantholders.+
|
|
(e)(1)
|
|
|
Agreement and Plan of Merger,
dated September 17, 2007, by and among Parent, Purchaser
and the Company (incorporated by reference to Exhibit 2.1
to the Companys Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 18, 2007).
|
|
(e)(2)
|
|
|
Employment Agreement, dated as of
December 23, 2004, between Factory Card Outlet of America,
Ltd. and Gary W. Rada (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on
Form 8-K
as filed on December 27, 2004).
|
|
(e)(3)
|
|
|
Amendment dated as of
December 9, 2005, between Factory Card Outlet of America,
Ltd. and Gary W. Rada (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on
Form 8-K
as filed on December 9, 2005).
|
|
(e)(4)
|
|
|
Employment Agreement, dated as of
December 23, 2004, between Factory Card Outlet of America,
Ltd. and Timothy F. Gower (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on
Form 8-K
as filed on December 27, 2004).
|
|
(e)(5)
|
|
|
Amendment dated as of
December 9, 2005, between Factory Card Outlet of America,
Ltd. and Timothy F. Gower (incorporated by reference to
Exhibit 99.3 to the Companys Current Report on
Form 8-K
as filed on December 9, 2005).
|
|
(e)(6)
|
|
|
Employment Agreement dated
December 24, 2004 between Factory Card Outlet of America
Ltd. and Michael Perri (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on
Form 8-K
as filed on May 3, 2007).
|
|
(e)(7)
|
|
|
Amendment dated December 9,
2005 between Factory Card Outlet of America Ltd. and Michael
Perri (incorporated by reference to Exhibit 99.2 to the
Companys Current Report on
Form 8-K
as filed on May 3, 2007).
|
|
(e)(8)
|
|
|
Amended and Restated Executive
Severance Plan, effective as of September 17, 2007
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
as filed on September 18, 2007).
|
|
(e)(9)
|
|
|
Employment Agreement, dated as of
December 9, 2005, between Factory Card Outlet of America,
Ltd. and Jarett A. Misch (incorporated by reference to
Exhibit 99.4 to the Companys Current Report on
Form 8-K
as filed on December 9, 2005).
|
|
(e)(10)
|
|
|
Separation Agreement of Jarett A.
Misch, VP/Controller/Chief Accounting Officer, dated as of
February 16, 2007 (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on
Form 8-K
as filed on February 20, 2007).
|
|
(e)(11)
|
|
|
Senior Executive Agreement dated
September 17, 2007 among Factory Card & Party
Outlet Corp., Factory Card Outlet of America Ltd., Amscan
Holdings, Inc. and Gary W. Rada (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
as filed on September 18, 2007).
|
|
(e)(12)
|
|
|
Senior Executive Agreement dated
September 17, 2007 among Factory Card & Party
Outlet Corp., Factory Card Outlet of America Ltd., Amscan
Holdings, Inc. and Timothy F. Gower (incorporated by reference
to Exhibit 10.3 to the Companys Current Report on
Form 8-K
as filed on September 18, 2007).
|
29
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
(e)(13)
|
|
|
Senior Executive Agreement dated
September 17, 2007 among Factory Card & Party
Outlet Corp., Factory Card Outlet of America Ltd., Amscan
Holdings, Inc. and Michael Perri (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on
Form 8-K
as filed on September 18, 2007).
|
|
(e)(14)
|
|
|
Executive Agreement dated
September 17, 2007 among Factory Card & Party
Outlet Corp, Amscan Holdings, Inc. and Timothy J. Benson
(incorporated by reference to Exhibit 10.5 to the
Companys Current Report on
Form 8-K
as filed on September 18, 2007).
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|
(e)(15)
|
|
|
Primary Supply and Consignment
Agreement dated January 26, 2006 between Factory
Card & Party Outlet Corp. and Amscan Holdings, Inc.
(incorporated by reference to Exhibit 10.30 to the
Companys Annual Report on
Form 10-K
as filed on April 19, 2006).
|
|
(e)(16)
|
|
|
Confidentiality Agreement, dated
as of April 24, 2007, between Goldsmith and Parent with
respect to the Company.+
|
|
(e)(17)
|
|
|
Information Statement of the
Company, dated October 1, 2007 (included as Annex II
to this
Schedule 14D-9).*
|
|
|
|
*
|
|
Included in copies mailed to stockholders of the Company.
|
|
+
|
|
Filed herewith.
|
30
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is
true, complete and correct.
FACTORY CARD & PARTY OUTLET CORP.
Gary W. Rada
President and Chief Executive Officer
Dated: October 1, 2007
31
Annex I
September 17,
2007
The Board of Directors
Factory Card & Party Outlet Corp.
2727 Diehl Road
Naperville, IL, 60563
Members of the Board of Directors:
We understand that Amscan Holdings, Inc., a Delaware corporation
(Parent), Amscan Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of Parent
(Newco), and Factory Card & Party Outlet
Corp., a Delaware corporation (the Company), propose
to enter into an Agreement and Plan of Merger (the Merger
Agreement), pursuant to which, among other things,
(i) Parent will cause Newco to offer to purchase all of the
outstanding shares of common stock, par value $0.01 per share,
of the Company (Company Common Stock) for a purchase
price of $16.50 per share, net to the seller in cash (the
Per Share Consideration), pursuant to a tender offer
(the Offer) for the Company Common Stock and
(ii) following the Offer, Newco will be merged with and
into the Company, with the Company continuing as the surviving
corporation in the merger and a wholly-owned subsidiary of
Parent (the Merger). Pursuant to the Merger, each
share of Company Common Stock issued and outstanding immediately
prior to the effective time of the Merger, other than shares of
Company Common Stock owned by the Company, Parent, Newco or any
of their respective affiliates, or any holder who is entitled to
and properly demands appraisal of such shares, shall be
automatically converted into the right to receive the Per Share
Consideration. The terms and conditions of the Offer and the
Merger are set out more fully in the Merger Agreement.
You have requested our opinion as of the date hereof as to the
fairness, from a financial point of view, to the holders of
Company Common Stock of the Per Share Consideration to be paid
to such holders in the Offer and the Merger.
As a customary part of its investment banking business,
Goldsmith, Agio, Helms Securities, Inc. is regularly engaged in
the valuation of businesses and their securities in connection
with mergers and acquisitions, private placements, and
valuations for corporate and other purposes. In return for our
services in connection with providing this opinion, the Company
will pay us a fee, which fee is not contingent upon the
consummation of the Offer or the Merger. We are also acting as
financial advisor to the Company (together with its subsidiaries
and affiliates) in connection with the Offer and the Merger, for
which we will receive certain other fees, a significant portion
of which are contingent upon the consummation of the Offer and
the Merger. The Company has also agreed to indemnify us against
certain liabilities in connection with our services and to
reimburse us for our out-of-pocket expenses. We
and/or
our
affiliates may have in the past provided, and may currently or
in the future provide, investment banking services to the
Company and Parent and its affiliates, for which we have
received or may receive customary fees. In addition, in the
ordinary course of their respective businesses, our affiliates,
and Lazard Capital Markets LLC (an entity indirectly owned in
large part by managing directors of one of our affiliates) may
actively trade securities of the Company for their own accounts
and for the accounts of their customers and, accordingly, may at
any time hold a long or short position in such securities.
www.agio.com
T 612 339 0500 F 612 339 0507
Goldsmith, Agio, Helms Securities, Inc.
225 South Sixth Street Forty-Sixth Floor
Minneapolis, Minnesota 55402
I-1
In arriving at our opinion, we have undertaken such reviews,
analyses, and inquiries as we deemed necessary and appropriate
under the circumstances. Among other things, we have
(i) reviewed the latest draft of the Merger Agreement,
dated September 7, 2007; (ii) reviewed certain
financial and other information that is publicly available
relating to the Company and the industry in which it operates;
(iii) reviewed certain internal financial forecasts and
other data of the Company that has been made available to us by
the Company; (iv) discussed with management of the Company
the past and present financial condition, operating results,
business outlook, and prospects of the Company;
(v) reviewed the historical stock prices and trading
volumes of the Company Common Stock; (vi) reviewed public
information with respect to certain other companies in lines of
business that we deemed generally comparable to the business of
the Company; and (vii) reviewed the financial terms of
certain business transactions involving companies in lines of
business that we deemed generally comparable to those of the
Company and in other industries generally.
We have relied upon and assumed, without independent
verification, the accuracy and completeness of the financial and
other information furnished by, or publicly available relating
to, the Company or otherwise made available to us. We were not
engaged to, and did not attempt to, or assume responsibility to,
verify independently such information. We have also relied upon
the representations and warranties contained in the Merger
Agreement and have assumed, without independent verification,
that they are true and correct. We have further relied upon
assurances by the Company that the information provided to us
has been reasonably prepared, and with respect to financial
forecasts and projections, we have assumed that such information
has been prepared on bases reflecting the best currently
available estimates and judgments of the management of the
Company as to the future financial performance of the Company,
and that the Company is not aware of any information or fact
that would make the information provided to us incomplete or
misleading. We assume no responsibility for and express no view
as to such financial forecasts or projections or the assumptions
on which they are based.
We have also assumed that the Company and the other parties to
the Merger Agreement will perform all of the covenants and
agreements to be performed under the Merger Agreement, and that
the conditions to the Offer and the Merger set forth in the
Merger Agreement would be satisfied and the Offer and the Merger
would be consummated on a timely basis in the manner
contemplated by the Merger Agreement. We have assumed that the
executed version of the Merger Agreement will not differ in any
material respects from the last draft we reviewed. We have
assumed the accuracy and completeness of all legal, tax,
regulatory and accounting advice received by the Company related
to the Offer and the Merger, and we have made no independent
investigation of any legal, tax, regulatory or accounting
matters that may affect the Company or its shareholders. We have
further assumed that all material governmental, regulatory, or
other consents and approvals necessary for consummation of the
Offer and the Merger will be obtained without any adverse effect
on the Offer, the Merger, the Company or its shareholders. In
that regard, we do not opine on, nor does our opinion consider,
any legal, tax, accounting, governmental, or regulatory matters.
We do not express any opinion as to the price at which shares of
Company Common Stock may trade at any time subsequent to the
announcement of the Offer or the Merger.
In arriving at our opinion, we have not performed any appraisals
or valuations of specific assets or liabilities of the Company,
nor have we been furnished with any such appraisals or
valuations. We have not given any advice to the Board of
Directors of the Company (the Board) regarding, and
this opinion does not address, any issues of solvency or fair
value of the Company. Our opinion is necessarily based upon the
information available to us and the facts and circumstances as
they exist and are subject to evaluation on the date hereof,
including the financial, economic, market, and other conditions
as in effect on the date hereof. Events and conditions occurring
or existing after the date hereof could materially affect the
assumptions used in preparing this opinion; however, we do not
have or undertake any obligations to update, revise, or reaffirm
this opinion.
Our opinion is rendered for the benefit of the Board in
connection with the Board members consideration of the
Merger Agreement and is not intended to be and does not
constitute a recommendation to any holder of Company Common
Stock as to how such holder should act or vote in connection
with the Offer, the Merger or any matter relating thereto. We
have not been asked to, nor do we, express any opinion as to the
relative
I-2
merits of the Offer and the Merger as compared to any
alternative business strategies that might exist for the
Company, the underlying business decision of the Company to
engage in the Merger, or the form of the Merger Agreement or the
terms contained therein. This opinion may not be disclosed or
otherwise used or referred to, in whole or in part, without our
written consent, except as may otherwise be required by law or
by a court of competent jurisdiction.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Per Share Consideration to be paid to
holders of Company Common Stock in the Offer and the Merger is
fair to such holders from a financial point of view.
Sincerely,
Goldsmith, Agio, Helms Securities, Inc.
I-3
Annex II
FACTORY
CARD & PARTY OUTLET CORP.
2727 Diehl Road
Naperville, Illinois 60563
Information
Statement Pursuant to
Section 14(f) of the Securities Exchange Act
of 1934 and
Rule 14f-1
Thereunder
This Information Statement is being mailed on or about
October 1, 2007 as part of the Solicitation/Recommendation
Statement on
Schedule 14D-9
(as amended or supplemented from time to time, the
Schedule 14D-9)
of Factory Card & Party Outlet Corp., a Delaware
corporation (the Company, we, or
us). You are receiving this Information Statement in
connection with the possible election of persons designated by
Amscan Acquisition, Inc. (Purchaser), a Delaware
corporation and wholly owned subsidiary of Amscan Holdings,
Inc., a Delaware corporation (Parent), to at least a
majority of the seats on the Board of Directors of the Company
(the Board or the Board of Directors).
On September 17, 2007, the Company entered into an
Agreement and Plan of Merger (the Merger Agreement)
with Parent and Purchaser, pursuant to which Purchaser is
required to commence a tender offer to purchase all of the
outstanding shares of common stock, par value $.01 per share, of
the Company (the Shares), at a price per Share of
$16.50, without interest thereon and less any required
withholding taxes, net to the seller in cash, on the terms and
subject to the conditions set forth in the Offer to Purchase,
dated October 1, 2007 (the Offer to Purchase),
and the related Letter of Transmittal (the Letter of
Transmittal). The Offer to Purchase and the Letter of
Transmittal, together with any amendments or supplements
thereto, collectively constitute the Offer. Copies
of the Offer to Purchase and the Letter of Transmittal have been
mailed to the stockholders of the Company and are filed as
Exhibit (a)(1)(A) and (a)(1)(B), respectively, to the Tender
Offer Statement on Schedule TO filed by Purchaser and
Parent (the Schedule TO) with the Securities
and Exchange Commission (the SEC) on October 1,
2007.
The Merger Agreement provides that, among other things, subject
to the satisfaction or waiver of certain conditions, following
completion of the Offer, and in accordance with the Delaware
General Corporation Law (the DGCL), Purchaser will
be merged with and into the Company (the Merger).
Following the consummation of the Merger, the Company will
continue as the surviving corporation (the Surviving
Corporation) as a wholly-owned subsidiary of Parent. At
the effective time of the Merger (the Effective
Time), each issued and outstanding Share (other than
Shares owned by the Company or its subsidiary, Parent,
Purchaser, or any other direct or indirect subsidiary of Parent,
and Shares held by stockholders who have perfected their
statutory dissenters rights of appraisal under
Section 262 of the DGCL) will be automatically converted
into the right to receive an amount in cash equal to $16.50 per
Share (the Merger Consideration), without interest
thereon and less any required withholding taxes. The Merger
Agreement is summarized in Section 12 of the Offer to
Purchase.
The Offer, the Merger and the Merger Agreement are more fully
described in the
Schedule 14D-9
to which this Information Statement is attached as
Annex II, which was filed by the Company with the SEC on
October 1, 2007.
This Information Statement is being mailed to you in accordance
with Section 14(f) of the Securities Exchange Act of 1934,
as amended (the Exchange Act), and
Rule 14f-1
promulgated thereunder. The information set forth herein
supplements certain information set forth in the
Schedule 14D-9.
Information set forth herein related to Parent, Purchaser or the
Purchaser Designees (as identified herein) has been provided by
Parent. You are urged to read this Information Statement
carefully. You are not, however, required to take any action in
connection with the matters set forth herein. Capitalized terms
used but not otherwise defined herein have the meanings set
forth in the
Schedule 14D-9.
II-1
Pursuant to the Merger Agreement, Purchaser commenced the Offer
on October 1, 2007. The Offer is scheduled to expire at
12:00 midnight, New York City time, on Monday, November 5,
2007, unless extended in accordance with its terms.
General
Information Regarding the Company
The Shares are the only class of equity securities of the
Company outstanding that is entitled to vote at a meeting of the
stockholders of the Company. Each Share is entitled to one vote.
As of September 25, 2007, there were 3,386,117 Shares
issued and outstanding. Parent and Purchaser own no Shares as of
the date hereof.
Parents
Right to Designate Directors to the Companys Board of
Directors
The Merger Agreement provides that promptly upon the purchase of
and payment for any Shares by Parent or Purchaser pursuant to
the Offer (provided the Shares so purchased represent at least a
majority of the Shares issued and outstanding on a fully diluted
basis), Parent will be entitled to designate such number of
directors, rounded to the nearest whole number, on the
Companys Board of Directors as is equal to the product of
the total number of directors on the Board (giving effect to the
directors so designated by Parent and the provisions of the
Merger Agreement) multiplied by the percentage that the number
of Shares so accepted for payment bears to the total number of
Shares then issued and outstanding on a fully diluted basis. The
Company will, upon Parent or Purchasers request, use all
reasonable efforts promptly either to increase the size of the
Board or to secure the resignations of such number of its
incumbent directors, or both, as is necessary to enable
Parents designees to be so elected to the Board.
After completion of the Offer and the election of the
Parents designees to the Companys Board of
Directors, the Company and Parent have agreed that at least
three directors who are currently members of the Board of
Directors and who are not officers of the Company will remain as
directors and serve on the Audit Committee of the Board at least
until completion of the Merger.
The following table sets forth certain information with respect
to the individuals Parent may designate to serve on the
Companys Board of Directors (each, a Parent
Designee), including their respective ages as of the date
hereof, current principal occupation or employment and five-year
employment history. Each Parent Designee is a citizen of the
United States.
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|
|
|
|
|
|
|
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Present Principal Occupation or Employment;
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Name
|
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Age
|
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Material Positions Held During Past Five Years
|
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Gerald C. Rittenberg
|
|
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55
|
|
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For more than the past five years,
Mr. Rittenberg has been Chief Executive Officer of Amscan
Holdings, Inc. and AAH Holdings Corporation. Mr. Rittenberg
also serves as a director of Amscan Holdings, Inc. and AAH
Holdings Corporation, and on the Board of Advisors of
Modells Sporting Goods.
|
James M. Harrison
|
|
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55
|
|
|
For more than the past five years,
Mr. Harrison has been President and Chief Operating Officer
of Amscan Holdings, Inc and President and Treasurer of AAH
Holdings Corporation. Mr. Harrison also serves as a
director of Amscan Holdings, Inc. and AAH Holdings Corporation.
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Robert J. Small
|
|
|
41
|
|
|
For more than the past five years,
Mr. Small has been a Managing Director of Berkshire
Partners. Mr. Small also serves as Chairman of the Board of
Directors of Amscan Holdings, Inc. and AAH Holdings Corporation,
and as a director of Amscan Acquisition, Inc. Mr. Small
served as a director of Hexcel Corporation within the past five
years.
|
Parent and Purchaser have informed the Company that each of the
individuals listed above has consented to act as a director of
the Company, if so designated. If necessary, Parent may choose
additional or other Parent Designees, subject to the
requirements of
Rule 14f-1.
None of the Parent Designees is currently a
II-2
director of, or holds any position with, the Company. Parent and
Purchaser have advised the Company that, to their knowledge,
none of the Parent Designees has a family relationship with any
director or executive officer of the Company or beneficially
owns any securities (or any rights to acquire any such
securities) of the Company. The Company has been advised by
Parent and Purchaser that, to their knowledge, none of the
Parent Designees has been involved in any transactions with the
Company or any of its directors, executive officers or
affiliates that are required to be disclosed pursuant to the
rules and regulations of the SEC, other than transactions
between Parent, Purchaser and the Company that have been
described in the Schedule TO or the
Schedule 14D-9.
Security
Ownership of Certain Beneficial Owners and Management
The Company emerged from bankruptcy on April 9, 2002.
Pursuant to its plan of reorganization, all pre-bankruptcy
common stock of the Company was cancelled and the Company issued
3,000,000 shares of new Common Stock. The Company also
issued the following warrants to purchase an aggregate of
306,934 additional shares of Common Stock:
(1) Series A warrants exercisable for an aggregate of
76,692 shares of Common Stock any time prior to
April 9, 2006 at a price of $5.50 per share, of which
warrants for 54,242 shares were exercised prior to the
expiration date;
(2) Series B warrants exercisable for an aggregate of
92,512 shares of Common Stock any time prior to
April 9, 2008 at a price of $8.00 per share, of which
warrants for 19,514 shares were exercised as of
September 27, 2007;
(3) Series C warrants exercisable for an aggregate of
76,692 shares of Common Stock any time prior to
April 9, 2010 at a price of $8.00 per share, of which
warrants for 5,676 shares were exercised as of
September 27, 2007; and
(4) Series D warrants exercisable for an aggregate of
61,038 shares of Common Stock any time prior to
April 9, 2010 at a price of $17.00 per share, of which
warrants for 888 shares were exercised as of
September 27, 2007.
The following table sets forth certain information with respect
to the beneficial ownership of the Companys Common Stock
as of September 27, 2007, for (1) each person who is
known by the Company to beneficially own more than 5% of the
Companys Common Stock, (2) each of the Companys
directors, (3) each of the current and former named
executive officers appearing in the Summary Compensation Table
below (the Named Executive Officers) and
(4) all current directors and Executive Officers as a
group. No shares are currently pledged as security by any of our
directors or executive officers.
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Directors, Executive Officers and 5% Stockholders
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Number(1)
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Percent
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Skylands Capital, LLC(2)
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189,602
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5.6
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CR Intrinsic Investors, LLC(3)
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175,000
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5.2
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Gary W. Rada(4)
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200,500
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5.7
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Timothy F. Gower(5)
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101,000
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2.9
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Timothy J. Benson(6)
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18,500
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*
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Michael Perri(7)
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47,523
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1.4
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Mone Anathan(8)
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|
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4,666
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|
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*
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Richard E. George(9)
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|
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49,166
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|
|
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1.4
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Ben Evans(10)
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35,333
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1.0
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Peter M. Holmes(11)
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33,333
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1.0
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Martin G. Mand(12)
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|
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33,333
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1.0
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Patrick W. OBrien(13)
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27,959
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*
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Robert S. Sandler(14)
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|
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34,833
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|
|
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1.0
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Jarrett A. Misch(15)
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0
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*
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All Executive Officers and
directors as a group (12 persons)(16)
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|
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586,146
|
|
|
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15.3
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|
II-3
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|
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*
|
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Less than 1% of the outstanding Common Stock.
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(1)
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Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock
subject to options and/or warrants held by that person that are
currently exercisable or exercisable within 60 days of
September 27, 2007, are deemed outstanding. Except as
indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to the
shares set forth opposite such persons name.
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(2)
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Based on Schedule 13G/A (Amendment No. 1) dated
January 5, 2007 filed by Skylands Capital, LLC. The address
of Skylands Capital, LLC is 1200 North Mayfair Road,
Suite 250, Milwaukee, WI 53226.
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(3)
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|
Based on a Schedule 13G dated May 1, 2007 filed by CR
Intrinsic Investors, LLC. The address of CR Intrinsic Investors,
LLC is 72 Cummings Point Road, Stanford, CT 06902
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(4)
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Includes 148,000 shares subject to options exercisable
within 60 days of September 27, 2007.
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(5)
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|
Includes 70,000 shares subject to options exercisable
within 60 days of September 27, 2007.
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(6)
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|
Includes 8,000 shares subject to options exercisable within
60 days of September 27, 2007.
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(7)
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Includes 32,500 shares subject to options exercisable
within 60 days of September 27, 2007. Mr. Perri
became an executive officer on April 30, 2007.
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(8)
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Includes 1,666 shares subject to options exercisable within
60 days of September 27, 2007.
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(9)
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Includes 36,666 shares subject to options exercisable
within 60 days of September 27, 2007.
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(10)
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|
Includes 31,333 shares subject to options exercisable
within 60 days of September 27, 2007.
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|
(11)
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|
Includes 28,333 shares subject to options exercisable
within 60 days of September 27, 2007.
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(12)
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Includes 29,333 shares subject to options exercisable
within 60 days of September 27, 2007.
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|
(13)
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Includes 23,333 shares subject to options exercisable
within 60 days of September 27, 2007.
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(14)
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Includes 30,833 shares subject to options exercisable
within 60 days of September 27, 2007.
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(15)
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Mr. Misch resigned as Chief Accounting Officer of the
Company on February 16, 2007.
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(16)
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Includes 439,997 shares subject to options exercisable
within 60 days of September 27, 2007.
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Current
Directors and Executive Officers of the Company
Directors
Mr. Mone Anathan
, age 67, has been a director
of the Company since April 27, 2006. Presently an
independent investor, from July 1988 through June 1997,
Mr. Anathan served as President, Treasurer and a director
of Filenes Basement Corp., an off-price specialty apparel
chain. From June 1997 until November 1999, he served
Filenes Basement Corp. in the capacity of Vice Chairman of
the board of directors and Chairman of the Executive Committee.
He served as President of the Filenes Basement division of
Federated Department Stores, Inc. from February 1984 until
Filenes Basement was purchased from Federated Department
Stores, Inc. in a management-led buyout in July 1988.
Mr. Anathan was a member of the board of directors of
Brookstone, Inc. from 1989 until 2005, serving various tenures
as Chairman of its Audit Committee and a member of its
Compensation Committee. Mr. Anathan also served as a
director of Lebenthal Funds, Inc., a municipal bond management
firm.
Mr. Ben Evans
, age 77, has served as a director
of the Company since April 2002. From 1989 until his retirement
in 1999, Mr. Evans was a consultant for Ernst &
Young in its corporate financial services group, concentrating
in the bankruptcy area. He became a partner at that firm in
1968. From 1978 through 1989, Mr. Evans was a member of the
corporate financial service group of Ernst & Whinney,
a predecessor firm to Ernst & Young, concentrating on
bankruptcy assignments, generally on behalf of unsecured
creditors committees, with special emphasis in the
apparel, retailing, food, drug and pharmaceutical industries.
Mr. Evans joined S.D. Leidesdorf & Company, a
predecessor firm to Ernst & Young, in 1954 as a junior
accountant. Mr. Evans is also a director of Accord
Financial Corp. and Penn Traffic Company.
II-4
Mr. Richard E. George
, age 68, has served as
the Non-Executive Chairman of the Board of Directors since April
2002. From 1996 to the present, Mr. George has served as
the President and Chief Executive Officer of R. G. Trends, Inc.,
an independent consulting company. From 1995 to 1996, he was
President and Chief Executive Officer of Handy Andy Home
Improvement Centers, Inc. From 1989 to 1994, Mr. George
served as Chairman and Chief Executive Officer of Ulta Salon,
Cosmetics & Fragrance, Inc. From 1962 to 1988,
Mr. George was employed by Jewel Companies, Inc./American
Stores Company and its affiliates, where he held various
management positions, including his most recent position of
President and Chief Executive Officer of Osco Drug, Inc.
Mr. George has a B.S. and M.A.S. from the University of
Illinois and is a Certified Public Accountant.
Mr. Peter Holmes
, age 48, has served as
director of the Company since April 2002. Mr. Holmes is
President and Chief Executive Officer of THG Global Inc., a
global sourcing firm. From May 2001 to February 2005,
Mr. Holmes was the President and Chief Executive Officer of
The Holmes Group, an independent consulting company.
Mr. Holmes has served as Vice President, Operations of
BiWay Stores, a retail chain operating over 250 stores in
Ontario and Atlantic Canada, from August, 2000 to May, 2001.
Mr. Holmes was Senior Vice President, Merchandising of
BiWay Stores from March, 1999 to August 2000. Prior to joining
BiWay Stores, he was Vice President, Merchandising of White Rose
Crafts & Nursery Sales Ltd. from 1996 to 1998. From
1977 to 1996 Mr. Holmes held various positions at Zellers
Inc., Canadas largest discount store chain, the most
recent as Vice President, Merchandise Administration &
Distribution.
Mr. Martin G. Mand
, age 70, has served as a
director of the Company since April 2002. Mr. Mand is
Chairman and Chief Executive Officer of Mand Associates,
Limited, a consulting, speaking and writing firm. From March
1990 to June 1994, Mr. Mand was Executive Vice President
and Chief Financial Officer of Nortel Networks. Prior to joining
Nortel, Mr. Mand served in various positions with the
DuPont Company from June 1961 to February 1990, most recently as
Vice President and Treasurer and previously as Vice President
and Comptroller. Mr. Mand is a director of Mizuho Corporate
Bank (USA) and Townsends, Inc. Mr. Mand holds a B.S. from
the University of Virginia and an M.B.A. from the University of
Delaware.
Mr. Patrick OBrien
, age 60, has served as
a director of the Company since April 2002. From October, 2005
to present, Mr. OBrien has been a Vice
President Asset Management of Kennedy Associates
Real Estate Counsel, Inc., a specialty pension fund advisory
firm. From March, 2005 to October, 2005, Mr. OBrien
served as Senior Vice President of MTM Management and FST Asset
Management, a luxury lodging firm. From July, 2001 to March,
2005, Mr. OBrien served as a Managing Partner of RMG
Capital Partners, LLC, a venture capital firm. Prior to joining
RMG Capital Partners, LLC, Mr. OBrien was a Director
of New Development at Dolce International from April, 2000 to
July, 2001, an Area Managing Director and General Manager at
Starwood Hotel & Resorts from April, 1998 to April,
2000, Senior Vice President at Le Meridien Hotels &
Resorts from 1995 to 1997, Executive Vice President at Sage
Enterprises from 1994 to 1995, and a Vice President at United
Airlines from 1987 to 1994. Mr. OBrien was also
employed by Westin Hotels & Resorts and its affiliates
from 1968 to 1987 where he held various management positions.
Mr. OBrien holds a B.A. from Michigan State
University.
Mr. Gary W. Rada
, age 53, has served as
President and Chief Operating Officer and a director since April
2002 and was named Chief Executive Officer in December 2002.
Prior to his current role, Mr. Rada served as Executive
Vice President from October 1999 to March 2002. From January
1998 to October 1999, he served as Senior Vice President and
General Merchandise Manager. From 1997 to 1998, Mr. Rada
served as the Vice President of General Merchandise for
Brunos, Inc., a Birmingham, Alabama supermarket and drug
chain. Prior to joining Brunos, he held various management
and merchandising positions with Jewel Companies, Inc./American
Stores Company, including Director and Merchandise Manager at
Osco Drug, Inc./American Drug Stores and Vice President of
Grocery Buying and Merchandising at Jewel Food Stores.
Mr. Robert S. Sandler
, age 76, has served as a
director of the Company since April 2002. Mr. Sandler is
President of Robert S. Sandler LLC, a business and financial
consulting company. From 1978 to 2001 Mr. Sandler served as
Executive Vice President of HSBC Business Credit (USA) Inc.
affiliate of HSBC Bank USA. Mr. Sandler holds a B.S. from
the Wharton School at the University of Pennsylvania and
attended the Graduate School of Business at Columbia University.
II-5
Executive
Officers
The following table sets forth certain information with respect
to the executive officers (Executive Officers) of
the Company as of September 27, 2007.
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Name
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Age
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Position
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Gary W. Rada
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53
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President, Chief Executive Officer
and Director
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Timothy J. Benson
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44
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Vice President, Treasurer and
Chief Financial Officer
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Timothy F. Gower
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55
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Senior Vice President, Operations
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Michael Perri
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51
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Senior Vice President -
Merchandising and Marketing
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Information with respect to the background and positions held at
the Company of Mr. Rada is set forth above under
Directors.
Mr. Benson
has served as Vice President, Treasurer
and Chief Financial Officer since February 2007. From December
2005 through February 2007, Mr. Benson served as Vice
President and Treasurer of the Company. Prior to that time,
Mr. Benson served in a variety of corporate finance and
accounting roles at the Company for approximately ten years.
Mr. Benson is a graduate of Augustana College and Lake
Forest Graduate School of Management.
Mr. Gower
has served as Senior Vice President,
Operations since October 1999. From April 1998 to October 1999,
Mr. Gower served as Vice President, Retail Store
Operations. Prior to that, from August 1997 to March 1998, he
served as Vice President of Store Operations for Zellers Inc.,
Canadas largest discount chain. Prior to joining Zellers,
he held various store operations positions with Office Max and
F&M SuperDrug Stores.
Mr. Perri
has served as Senior Vice
President Merchandising and Marketing of the Company
since April 2007. Mr. Perri previously held the role of
Vice President of Merchandising with the Company from April 2002
through April 2007. Mr. Perri joined the Company in March
1998 as Director of Merchandising, a position of which he held
until his promotion to Vice President in 2002.
Information
Regarding the Board of Directors and Committees
Committees
and Meetings of the Board of Directors
During the fiscal year ended February 3, 2007, the Board
met 14 times. The Board currently has two standing committees:
the Audit Committee and the Compensation Committee. The Board
has determined that Messrs. Anathan, Evans, George, Holmes,
Mand, OBrien and Sandler are independent as
defined in Rule 4200 of the listing standards of the
National Association of Securities Dealers. During the fiscal
year ended February 3, 2007, each director attended all of
the meetings of the Board and its committees on which he served.
The Companys non-management directors held 14 meetings
during the fiscal year ended February 3, 2007 separately in
executive session without any members of management present. The
Companys Corporate Governance Guidelines provide that the
presiding director at each such session is the Chairman of the
Board or lead director, or in his or her absence, the person the
Chairman of the Board or lead director so appoints. The Chairman
of the Board currently presides over executive sessions of the
non-management directors.
As a general matter, members of the Board of Directors are
encouraged to attend the Companys annual meeting of
stockholders absent a pressing reason.
The Audit Committee, which held eight meetings during the fiscal
year ended February 3, 2007, consists of Mr. Evans,
Mr. Anathan and Mr. OBrien. The Audit Committee
is primarily responsible for approving the services performed by
the Companys independent auditors, for reviewing and
evaluating the Companys accounting principles and its
systems of internal accounting controls, as well as other
matters which may come
II-6
before it or as directed by the Board. A copy of the charter for
the Audit Committee, as amended, was attached as Exhibit A
to the Proxy Statement relating to the Companys 2007
annual meeting of stockholders.
The Board has determined that all members of the Audit Committee
are independent as defined in Rule 4200 of the
listing standards of the National Association of Securities
Dealers. Additionally, the Board has determined that
Mr. Evans is a financial expert as defined by
the Securities and Exchange Commissions regulations and
has financial sophistication as required by
Rule 4350 of the listing standards of the National
Association of Securities Dealers.
The Compensation Committee, which held six meetings during the
fiscal year ended February 3, 2007, consists of
Mr. Mand, Mr. Holmes and Mr. Sandler. The
Compensation Committee reviews and recommends to the Board for
approval the compensation and benefits for the Companys
executive officers, administers the Companys stock plans
and performs such other duties as may from time to time be
determined by the Board. The Committee is empowered to retain
persons having special competence as necessary to assist the
Committee in fulfilling its responsibilities. The Committee may
delegate any functions and powers to the chief executive officer
of the Company or any other officer or employee of the Company
if, in the exercise of its judgment, the Committee determines
that such delegation is necessary or appropriate, unless such
delegation would be contrary to: the intent of the Board
expressly set forth in its resolutions, the bylaws or
certificate of incorporation of the Company, or Delaware law. A
copy of the charter for the Compensation Committee, as amended,
was attached as Exhibit B to the Proxy Statement relating
to the Companys 2007 annual meeting of stockholders.
Relationships
Among Directors or Executive Officers
There are no family relationships among any of the directors or
executive officers of the Company.
Nominating
Process
The Board of Directors does not currently have a separately
designated nominating committee. As a result, the members of the
Board of Directors who are independent as defined in
Rule 4200 of the listing standards of the National
Association of Securities Dealers perform the functions that
would typically be performed by a nominating committee. In this
capacity, the independent members of the Board of Directors,
among other things, establish and periodically review the
criteria for board membership, identify new director candidates,
evaluate incumbent directors and make determinations regarding
the appropriate size of the Board of Directors and the
appointment of members to the Board of Directors
committees. The Board of Directors may retain a third-party
search firm to assist it in identifying potential new director
candidates.
If the Merger has not been consummated, the independent members
of the Board of Directors will consider a stockholders
nominee for election to the Companys Board of Directors in
2008 if any such suggestion is made in writing, includes
biographical data and a description of such nominees
qualifications and is accompanied by the written consent of such
nominee. Any such suggestion for nominees must be mailed to the
Company at 2727 Diehl Road, Naperville, Illinois 60563,
Attention: Secretary, and received by the Secretary no later
than March 1, 2008. The mailing envelope should contain a
clear notation indicating that the enclosed letter is a
Shareholder-Director
Nominee. Nominees for election to the Board of Directors
should at minimum satisfy the following criteria:
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Possess the integrity and mature judgment essential to effective
decision making.
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Have the ability and willingness to commit necessary time and
energy to prepare for, attend and participate in meetings of the
Board of Directors and one or more of its standing committees
and not have other directorships, trusteeships or outside
involvements which would materially interfere with
responsibilities as a director of the Company.
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Have the willingness and availability to serve at least one term.
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II-7
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Have the willingness and ability to represent the interests of
all of the Companys stockholders rather than any special
interest or constituency while keeping in perspective the
interests of the Companys employees, customers, local
communities and the public in general.
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Have background and experience that complement the background
and experience of other members of the Board of Directors.
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Be a Company stockholder or willing to become a Company
stockholder.
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Be free from interests that are or would present the appearance
of being adverse to, or in conflict with, the interests of the
Company.
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Have a proven record of competence and accomplishment through
demonstrated leadership in business, education, government
service, finance or the sciences, including director, CEO or
senior management experience; academic experience; technical and
industry experience; financial and accounting experience; or
other relevant experiences which will provide the Board of
Directors with perspectives that will enhance Board of Directors
effectiveness, including perspectives that may result from
diversity in ethnicity, race, gender, national origin or
nationality.
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Stockholder
Communications to Board of Directors
Stockholders who wish to communicate with the Board of Directors
or a particular director may do so by sending a letter to the
Secretary of the Company at 2727 Diehl Road, Naperville,
Illinois 60563. The mailing envelope must contain a clear
notation indicating that the enclosed letter is a
Stockholder-Board Communication or
Stockholder-Director
Communication. All such letters must identify the author
as a stockholder and clearly state whether the intended
recipients are all members of the Board of Directors or certain
specified individual directors. The Secretary will make copies
of all such letters and circulate them to the appropriate
director or directors.
Code of
Ethics
The Company has adopted a Code of Ethics for Principal Executive
and Senior Financial Officer which is applicable to the
Companys Chief Executive Officer and Chief Financial
Officer. The Company undertakes to, and will, deliver to any
person a copy of its Code of Ethics for Principal Executive and
Senior Financial Officers upon request submitted to Factory
Card & Party Outlet Corp. 2727 Diehl Road, Naperville,
Illinois 60563, Attn: Secretary.
EXECUTIVE
COMPENSATION AND RELATED INFORMATION
Compensation
Discussion and Analysis
This Compensation Discussion and Analysis
(CD&A) is provided to assist our stockholders
in understanding the compensation awarded, earned by, or paid
to, the Companys named executive officers during
2006.
1
Our named executive officers during 2006 listed in
the Summary Compensation Table below consist of our three
executive officers as of February 3, 2007 (our chief
executive officer, our former chief accounting officer and our
senior vice president-operations) and our current chief
financial
officer.
2
In addition, the CD&A is intended to put into perspective
for our stockholders the compensation tables on pages II-17
through II-20 and the narrative information that accompanies
them.
1
Our
fiscal year 2006 runs from January 29, 2006 to
February 3, 2007. References to 2006 in this
Compensation Discussion and Analysis refer to that fiscal year.
2
We
use the terms named executive officers and
executive officers interchangeably in this
Compensation Discussion and Analysis since our named executive
officers consist of all of our executive officers as of
February 3, 2007 and our current chief financial officer.
II-8
The first part of this discussion describes the primary
objectives of our compensation programs and how they are
designed to reward achievement in accomplishing target corporate
goals. Following that, we describe the key elements of our
compensation and why we have selected those elements of
compensation. Finally, we describe how we determine the form and
amount of each compensation element to meet our compensation
objectives and support our business strategy.
Compensation
Objectives and Process
Objectives.
The objectives of our executive
officer compensation program are to attract, retain, motivate
and reward key personnel who possess the necessary leadership
and management skills through competitive base salary, annual
cash bonus, long-term incentive compensation in the form of
stock-based awards, and various benefits, including medical and
life insurance plans. Our executive officer compensation
policies are intended to combine competitive levels of
compensation and rewards for performance and to align relative
compensation with the achievements of key business objectives
and maximization of stockholder value. The Board believes that
stock ownership by management is beneficial in aligning
management and stockholder interests, thereby enhancing
stockholder value.
Who Sets Our Executive Compensation?
The
Compensation Committee of our Board, composed entirely of
independent directors, administers our executive officer
compensation program. The Compensation Committees primary
responsibilities include reviewing and recommending to our full
Board (excluding any interested director) for approval the
compensation of our executive officers, such compensation
consisting of salary, bonus, long-term equity incentive
compensation, benefits and other compensation.
The Compensation Committee has a charter which generally sets
forth its responsibilities. A copy of the Compensation Committee
charter was attached as Exhibit B to the Proxy Statement
relating to the Companys 2007 annual meeting of
stockholders. The charter is also available on our website at
http:// www. factorycard.com.
Our management makes recommendations to the Compensation
Committee on specific elements of compensation and goals for our
executive officers, with the exception of our chief executive
officer. The Compensation Committee considers these
recommendations in executive session and can accept, reject or
modify them before forwarding to our Board for approval.
In making its recommendations to our Board, the Compensation
Committee has periodically received advice and recommendations
from Pearl Meyer & Partners. Pearl Meyer &
Partners has assisted us in developing our executive
compensation program and philosophy, including offering advice
on our peer group companies and advising us on the advantages
and disadvantages of various types of equity grants, including
restricted stock and stock options. A Pearl Meyer &
Partners consultant has been present at selected Compensation
Committee meetings, including executive sessions, to discuss
officer and director compensation matters. Pearl
Meyer & Partners has made, and may make,
recommendations to the Compensation Committee, independent of
management, on executive compensation generally and on the
specific compensation of our executive officers.
Our Board, based upon the recommendations of the Compensation
Committee, normally determines base salary for our executive
officers annually at its regularly-scheduled April meeting, to
go into effect the first Sunday in April (when base salary
increases for exempt employees normally occur). Our Board, based
upon the recommendations of the Compensation Committee, normally
determines annual bonus targets and long-term equity incentives
and relevant performance expectations for a year for our
executive officers annually at its regularly-scheduled meeting
at or around the end of the prior fiscal year. Our Board, based
upon recommendations of the Compensation Committee, may set
salary and grant bonus and long-term equity incentives for
executive officers at other times to reflect promotions and new
hires.
Our Targets and Benchmark.
We set each of base
salary, annual bonus target and long-term incentives separately
in light of our evaluation of the competitive situation, the
incumbents performance and experience, and the levels of
those compensation elements at a peer group of companies. That
process determines the mix of base salary, annual bonus and
long-term equity incentives for each of our executive officers.
It also determines the mix of cash and stock compensation, since
we regularly pay base compensation and annual
II-9
bonus in cash, and we regularly pay long-term incentives in
stock, to align our executives interests with those of our
stockholders. We then tally the resulting total compensation to
confirm that it is appropriate for the position or make
adjustments accordingly.
Our policy is to target executive officers base salary,
annual bonus and annual long-term equity incentive value to be
at about the
70
th
percentile
level of companies participating in the Retail Compensation and
Benefits Survey prepared by Mercer Human Resource Consulting
LLC. We also review our benefit package, and consider the
practices of comparable companies for specific types of
benefits. Data provided by the Retail Compensation and Benefits
Survey prepared by Mercer indicates that the nature and value of
the benefits we provide are competitive with those offered by
comparable retail companies.
Our Peer Group.
We compare our compensation
practices for our executive officers to other public companies
by using competitive market data compiled by management. Most of
these companies are retailers competing for management employees
in the same areas of expertise as we do. Several of these
companies are our direct competitors in the retail party chain
industry. In selecting our peer group companies, the
Compensation Committee takes into account revenues, number of
employees and number of retail outlets.
The Compensation Committee reviews and approves the selection of
peer group companies based primarily on the factors listed
above. The list of peer group companies that we use may change
from year to year based on the Compensation Committees
evaluation of those factors. Historically, we have used the
following peer group companies:
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A.C. Moore
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Bakers Footware Group
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Celebrate Express
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E Com Ventures
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Franklin Covey
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Hancock Fabrics
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Hibbett Sport Goods
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I Party
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Jos. A. Bank
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Kirklands
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Party City
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Party City was acquired on December 23, 2005. Accordingly,
Party City will not be included in our peer group companies for
2007 and beyond.
Elements
of our Compensation
The four key elements of our executive officers
compensation are:
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Base salary
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Annual bonus
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Long-term equity incentive awards
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Benefits
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This section describes the general features of each of these
elements. We cover later in this CD&A why we provide each
element of compensation and the form we pay it in and how we
determine the amount we pay.
II-10
Base Salary.
Base salaries provide an
underlying level of compensation security to executives and
allow us to attract competent executive talent and maintain a
stable management team. Base salaries for our executive officers
are determined on the basis of the executive officers
responsibility, general salary practices of peer companies and
the executive officers individual qualifications and
experience. The base salaries are reviewed annually and may be
adjusted by our Board, based upon the recommendations of the
Compensation Committee, in accordance with certain criteria
which include individual performance, the functions performed by
the executive officer, the scope of the executive officers
on-going duties, length of service, general changes in the
compensation peer group in which we compete for executive
talent, and our general financial performance. The weight given
such factors by the Compensation Committee may vary from
individual to individual.
Annual Bonus.
Bonuses give our executive
officers an increased cash compensation opportunity. They reward
our executive officers for short-term (annual) achievement in
accomplishing target corporate goals. The Compensation Committee
believes that a cash incentive bonus plan can serve to motivate
our executive officers to address annual performance goals using
more immediate measures for performance than those reflected in
the appreciation and value of equity awards. Executive
officers bonus opportunity recognizes their senior-level
responsibilities and duties and the competitive environment in
which we must recruit and retain our senior management.
Our Management Incentive Plan (the Bonus Plan) sets
the terms for awarding bonuses to our executive officers (and
other employees). Our performance-based annual bonus amounts
depend on our performance against predetermined target corporate
goals, which are discussed below. Our Board, based upon the
recommendations of the Compensation Committee, sets these
targets for a fiscal year annually at the regularly scheduled
Board meeting near the end of the Companys prior fiscal
year. We describe in more detail below the applicable
performance measures and goals for fiscal year awards and why
these performance measures and goals are chosen. Bonuses can be
earned for each year and are payable after receipt of audited
financial results for the fiscal year.
Long-Term Equity Incentive Awards.
Because of
our focus on pay for performance, various forms of other
incentive compensation are major elements of pay for our
executive officers.
Equity Incentive Plan.
We grant equity awards
to our officers (including our executive officers) under our
2003 Equity Incentive Plan (the Incentive Plan),
which was approved by our stockholders. The Incentive Plan
allows us to award long-term compensation in the form of:
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Non-qualified options to purchase shares of Company common stock
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Qualified incentive stock options to purchase shares
of Company common stock
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Restricted stock shares
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Stock appreciation rights or SARS
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Performance shares paying out a variable number of shares
depending on goal achievement
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Performance units which involve cash payments based on either
the value of the shares or appreciation in the price of the
shares upon achievement of specific goals
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Options General.
Stock options
represent the opportunity to purchase shares of our common stock
at a fixed price at a future date. The Incentive Plan requires
that the per-share exercise price of our options not be less
than the fair market value of a share on the date of grant. This
means that our stock options have value for our executive
officers only if our common stock price appreciates from the
date the options are granted and the executive officers remain
employed by the Company through the vesting period. This design
focuses our executive officers on increasing the value of our
common stock over the long term, consistent with
stockholders interests.
Although our Incentive Plan allows us to grant
incentive stock options, all the options we have
granted have been non-qualified options.
II-11
Restricted Stock.
Restricted stock represents
the right of the participant to vest in shares of common stock
upon lapse of restrictions. Restricted stock awards are subject
to forfeiture during the period of restriction. Depending on the
terms of the award, restricted stock may vest over a period of
time subject only to the condition that the executive officer
remains an employee (time vesting), or may be
subject to additional conditions, such as the Company meeting
target performance goals (performance vesting), or
both.
Restricted stock is an incentive for retention and performance
of both newly hired/promoted and continuing executive officers
and other officers. Unlike options, restricted stock retains
some value even if the price declines. Because restricted stock
is based on and payable in stock, it serves, like options, to
reinforce the identity of interests between our executive
officers and our stockholders. In addition, because restricted
stock has a real, current value that is forfeited if an
executive officer quits, it provides a significant retention
incentive.
As discussed below, we have granted restricted stock (some
grants with time vesting and other grants with performance
vesting).
Stock Appreciation Rights or SARS.
A stock
appreciation right represents the right to receive payment in
shares of common stock or, if permitted by Section 409A of
the Internal Revenue Code (the Code) without causing
the stock appreciation rights to be treated as deferred
compensation, cash in an amount equal to the excess of the fair
market value of the shares on the date of exercise over the fair
market value of the shares at the time of grant. Each stock
appreciation right is evidenced by a written stock appreciation
right agreement. No cash or other consideration will be required
to be paid by the plan participant to receive the cash or
shares, other than the terms and conditions determined by our
Board and specified in the stock appreciation right agreement.
Terms and conditions of the stock appreciation rights could
include the completion of a specified number of years of service
or attaining certain performance goals prior to the rights
subject to the award becoming vested. A plan participant holding
a stock appreciation right will have none of the rights of a
stockholder (including the right to receive the payment of cash
dividends) until such time as shares, if any, are actually
issued. Upon termination of the employment of an employee, any
unvested portion of a stock appreciation right will be forfeited.
Although the Incentive Plan allows us to grant SARs, we have not
done so.
Performance Shares and Performance
Units.
Performance shares are an award of a
variable number of shares. The number of performance shares
actually earned and issued to the individual depends on Company
performance in meeting prescribed goals over a defined period.
This means that performance shares are issued and the award has
value only to the extent the performance goals are achieved.
Performance goals serve the same objectives of creating
long-term stockholder value as is the case with stock options,
with an additional focus on a specific financial performance
metrics. In addition, performance shares may be less dilutive of
stockholder interests then options of equivalent economic value.
Although the Incentive Plan allows us to grant performance
shares, we have not done so.
Benefits.
In general, we cover executive
officers under the benefit programs described below to provide
them with the opportunity to save for retirement and to provide
a safety net of protection against the loss of income that can
result from termination of employment, illness, disability, or
death. Apart from severance and change-of-control arrangements,
the benefits we offer to our executive officers are generally
the same as those we offer to our salaried employees with some
variation based on industry practices and to replace benefit
opportunities lost to regulatory limits.
Retirement
Benefits.
401(k) Plan.
We maintain the Factory
Card & Party Outlet 401(k) Plan (the 401(k)
Plan), a tax qualified defined contribution plan, for
eligible employees, including but not limited to our executive
officers. The plan offers a voluntary pretax salary deferral
feature under Section 401(k) of the Code and a one
dollar-for every three-dollar (up to 6%) contribution by the
Company of a participating employees salary and bonus.
Participants can invest their accounts in any of a selection of
mutual funds offered under the 401(k) Plan.
II-12
Supplemental Incentive Savings Plan.
The Code
limits tax-advantaged benefits for highly compensated officers
(a category that includes all our executive officers) under the
401(k) Plan in several ways: nondiscrimination rules that
restrict their deferrals and matching contributions based on the
average deferrals and matching contributions of non-highly
compensated employees; limits on the total dollar amount of
annual additions for any employee; limits on the total annual
amount of elective deferrals; and a limit on the salary and
bonus used to determine benefits under the 401(k) Plan.
We adopted the Factory Card & Party Outlet
Supplemental Incentive Savings Plan (the Supplemental
Plan) to provide retirement benefits for our officers
(including our executive officers) on the same basis, in
proportion to pay, as we provide retirement benefits to all our
salaried employees generally. Therefore, we contribute to the
Supplemental Plan the difference between the amount that would
have been contributed to the participants 401(k) Plan
accounts but for the Code limitations, and the contributions
actually made to their 401(k) Plan accounts. Earnings on these
contributions are determined by participants designation
of investment funds from the same group of funds that is
available under the 401(k) Plan.
We do not have any pension plan or actuarial arrangements for
our executive officers or any other employee.
Severance and Change-Of-Control Benefits.
We
have an Executive Severance Plan (the Severance
Plan) which covers each officer of the Company who is not
party to an employment agreement with us (currently 5 officers).
The purpose of the Severance Plan is to protect officers against
an involuntary loss of employment, particularly after a change
in control, so as to attract and retain such officers and
motivate them to enhance the value of the Company. A participant
in the Severance Plan who is terminated without
cause or terminates his or her employment for
good reason is entitled to severance pay equal to
the sum of six months of salary plus the pro rata target annual
bonus the participant would have been entitled to had he or she
remained employed until the end of the fiscal year in which
termination occurred, payable over a period of six months. In
the event such termination occurs within two years after a
change in control, the participant would be entitled to
severance pay equal to the sum of eighteen months of salary plus
pro rata target annual bonus, payable in a single lump sum
payment. However, to the extent required by Section 409A of
the Code, any severance payment to a participant shall not be
made before six months after the participants termination
of employment; provided that any such payment that is delayed
must be deposited in a trust pending payment to participant. The
participant is also entitled to a continuation of health and
life insurance benefit plans (but not any disability plan or
401(k) plan) during the period of severance payments. Finally,
in the event the termination occurs within two years after a
change in control, all of the participants equity awards
would become fully vested and exercisable.
The Severance Plan generally defines a change in
control as:
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The acquisition by any person or group of 30% or more of the
beneficial interest in the equity of the Company;
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Failure of the current Board (and members nominated by at least
majority of the then-current Board members) to comprise at least
a majority of the Board during any period of two consecutive
years; or
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The sale or other divestiture of all or substantially all of our
assets.
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We use a 30% threshold to define a change in control because in
a company like ours where stock ownership is not fairly widely
distributed, a single person (or group) owning 30% of the stock
can exercise in practice a disproportionate control over
management and its policies.
In connection with the execution of the Merger Agreement and as
described in more detail in the accompanying
Schedule 14D-9
under Item 3(a) Arrangements with Current Executive
Officers and Directors of the Company Severance
Plan, the Severance Plan was amended and restated to
provide that prior to July 1, 2009 or, in the event that
the Offer is consummated, December 31, 2011, no amendment,
modification, suspension or termination of the Severance Plan
may adversely affect the rights of any participant without his
or her written approval unless required by law.
II-13
Mr. Timothy J. Benson, Vice President, Treasurer and Chief
Financial Officer, is covered by the Severance Plan. Gary W.
Rada, President and Chief Executive Officer, Timothy F. Gower,
Senior Vice President, Operations, and Michael Perri, Senior
Vice President Merchandising and Marketing, are not
covered by the Severance Plan as they have employment agreements
with us that include severance and change of control
arrangements. We describe these employment agreements and the
amendments thereto beginning on
page II-20.
Other Benefits.
Our executive officers receive
other benefits that we provide to our salaried employees
generally. These are:
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Medical benefits
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Vacation and personal days
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Group term life insurance
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Short-term and long-term disability protection
|
We also provide miscellaneous perquisites to executive officers,
including a car allowance.
Determining
the Form and Amount of Compensation Elements to Meet our
Compensation Objectives
Setting Base Salaries.
Our Board, based upon
the recommendations of the Compensation Committee, sets the
salaries of our executive officers based on differences in
individual performance, experience and knowledge, and our
comparison of the responsibilities and importance of the
position with us to the responsibilities and importance of
similar positions at peer group companies. In making this
comparison, we analyze salary ranges and pay scale information.
We also consider internal equity within our Company and, when
reviewing salary of executive officers, their current
compensation from the Company.
Gary W. Rada (President and Chief Executive Officer) and Timothy
F. Gower (Senior Vice President, Operations) each has an
employment agreement with the Company. The employment agreements
provide for the Company to pay the executives the following
annual base salaries, subject to annual review and increases at
the discretion of our Board: Mr. Rada $420,000,
and Mr. Gower $257,000.
Jarett A. Misch (former Vice President, Controller and Chief
Accounting Officer) had an employment agreement with the Company
as of February 3, 2007 providing for an annual base salary
of $183,000.
Our Board, upon the recommendation of Compensation Committee,
approved an annual salary of the $210,000 for Mr. Benson
upon his appointment as Chief Financial Officer on
February 19, 2007.
Our Board, upon the recommendation of the Compensation
Committee, approved the following annual salaries for
Mr. Rada and Mr. Gower, effective April 1, 2007:
Mr. Rada $445,000; and
Mr. Gower $268,100.
Setting Bonuses.
For executive officers, the
performance targets for annual incentive bonuses under the Bonus
Plan are usually communicated to the executives in February of
each year based on our annual operating plan. Payment of bonuses
is based on attaining specific financial goals approved by the
Board (based upon the recommendations of the Compensation
Committee). For 2006, a target bonus amount was established for
each executive officer as a percentage of his base salary, as
shown in the table below. The target bonus percentages of base
salary for our named executive officers who have employment
agreements with the Company are set by their agreements, subject
to annual review and increases at the discretion of our Board.
The current target bonus percentages are
Mr. Rada 70%, Mr. Gower, 40%, and
Mr. Misch, 30%. The current target bonus percentage for
Mr. Benson, who is not party to an employment agreement, is
35%. A percentage ranging from 40% (threshold or minimum)
through 100% (target) to 150% (maximum) of this amount (with
interpolation) is payable based on the Companys attainment
of threshold (minimum), target, or maximum results on the
performance measure(s) selected by the Board.
For 2006, the performance measures consisted of two components:
(a) earnings before taxes: with goals of $2,815,000 for
threshold performance, $3,519,000 for target performance and
$4,927,000 for maximum
II-14
performance; and (b) net inventory turn: with goals of 2.25
times for threshold performance, 2.28 times for target
performance and 2.34 times for maximum performance. For each of
the executive officers, 80% of his target annual bonus is
determined by the earnings before taxes component and the
remaining 20% is determined by the net inventory turn component;
provided that (a) the payment under either component may
not exceed 200% of the target bonus for such component; and
(b) no bonus would be payable under either component if the
Company failed to achieve a minimum earnings before taxes of
$2,815,000. In no event can the overall individual bonus exceed
150% of the target bonus.
The Companys earnings before taxes for 2006, as adjusted
for the purpose of the bonus calculation to exclude certain
special items (the majority of which relate to a recent
accounting provision) was $4,202,448 and its net inventory turns
were 2.257 times. Based on these results, each of our executive
officers received 148.5% of the earnings before taxes component
of the annual bonus, 53.5% of the net inventory turn component
of the annual bonus and approximately 129.5% of the overall
bonus payment. The overall bonus payment for each of our
executive officers is set forth in the table below.
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Target
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Actual
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Payment as a
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Target
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Maximum
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Actual
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Award as a
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Name
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% of Salary
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Award
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Award
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Award
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% of Salary
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(Dollar value)
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(Dollar value)
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(Dollar value)
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Gary W. Rada
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70
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$
|
294,000
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$
|
441,000
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$
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380,730
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90.65
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Timothy J. Benson
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30
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$
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50,100
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$
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75,150
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$
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64,880
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38.85
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Timothy F. Gower
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40
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$
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102,800
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$
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154,200
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$
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133,126
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51.80
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Jarett A. Misch
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30
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$
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54,900
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|
$
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82,350
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$
|
71,096
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38.85
|
|
The actual bonus paid as a result of the formula is shown in the
Non-Equity
Incentive Plan Compensation column of the Summary Compensation
Table on
page II-17.
Setting
Long-Term Equity Incentive Awards.
Our Objectives.
In keeping with our commitment
to provide a total compensation package that favors equity
components of pay, long-term equity incentives traditionally
have comprised a significant portion of an executive
officers total compensation package.
Our Procedures.
Until April 2005, we
historically made our long-term equity incentive awards in the
form of stock options at the regularly scheduled meeting of our
Board in April of each year. By this time, we normally have our
results for the last year and our annual operating plan for the
current year and we are able to set targets and goals for the
current year for any performance based-awards we may grant.
Making our long-term equity incentive awards early in the year
lets our executive officers know what the criteria are for any
performance-based long-term incentive equity awards so they can
keep those goals in mind going forward. As discussed below, our
Board believes that the grant of restricted stock made in
January 2006 was designed to incentivize our executive officers
for the period through February 2009.
Selecting the Type of Award(s).
Until 2005,
our long-term equity incentives were nonqualified stock option
grants. In 2005, the Compensation Committee, after consulting
with Pearl Meyer & Partners, began to reconsider the
equity compensation policies in light of the pending changes in
accounting principles for options and the dilutive effect of
option grants. In June 2005, our Board began to transition from
stock option grants to restricted stock by granting to executive
officers an aggregate of 6,500 shares of restricted stock
that vest
33
1
/
3
%
per year over a three year period. This grant was made as an
interim component of the Companys stock-based awards for
fiscal 2005. The Compensation Committee determined to reexamine
potential additional restricted stock grants later in fiscal
2005 based on the Companys performance and the final
accounting rules relating to equity grants.
The transition to restricted shares is intended to maintain our
emphasis on creating long-term stockholder value, reduce
stockholder dilution, effectively manage the financial cost of
equity incentives, provide targeted performance incentives in
lieu of the specific incentive to increase share value provided
by options, and provide appropriate retention incentives. The
actual choice among options, performance shares and restricted
stock depends on business conditions and the competitive market
for executive talent.
II-15
Determining the Amount of Award(s).
In January
2006, our Board, based upon recommendations of the Compensation
Committee, granted to our named executive officers an aggregate
of 28,500 shares of restricted stock. The shares are
subject to performance vesting as follows: (a) 50% if the
Company achieves a return on invested capital (ROIC) at least
12.5% but less than 13.0% for any rolling 12 consecutive-month
period beginning after January 28, 2006 and ending on or
before the earlier of (i) a specified change of control or
(ii) February 2, 2009; (b) 75% if the ROIC for
any such period is at least 13.0% but less than 13.5%; and
(c) 100% if the ROIC for any such period is 13.5% or above.
In addition, subject to certain exceptions such as death,
disability, etc., the recipient of the restricted stock must
remain employed by the Company during the period the Company
achieves the specified ROIC performance. In the event that the
Company does not achieve the specified ROIC performance on or
prior to the earlier of (a) a specified change of control
or (b) February 2, 2009, the shares of restricted
stock will be forfeited. When awarding long-term equity
incentives, we consider each executive officers level of
responsibility, prior experience, historical award data, various
performance criteria and compensation practices at our peer
group companies.
In recommending this grant to our Board, the Compensation
Committee considered, among other things, the relative value of
restricted stock compared to stock options, the interim grant of
restricted stock to executive officers in June 2005 and the
accounting treatment for the equity grant. Our Board determined
that this grant was designed to provide additional incentives to
the executive officers during the three-year period ending
February 2, 2009.
Our Board believes that the grant of restricted stock with
performance vesting provides additional incentives to our
executive officers to: (a) positively drive short-term and
long-term earnings performance; (b) achieve the
Companys previously announced 13.5% return on invested
capital goal; and (c) make a long-term career at the
Company.
Determining Option Timing and Exercise
Price.
As discussed above, our Incentive Plan
requires that the exercise price for any option must be at least
equal to 100% of the fair market value of a share on the date
the option is granted. It specifies that the date an option is
granted to an executive officer is the day on which the Board or
Compensation Committee acts to grant the option. In addition,
the Incentive Plan stipulates that fair market value is the
closing sale price of shares of Company common stock on the
principal securities exchange on which they are traded. We
follow these requirements in setting the exercise price, which
is therefore the grant date closing price.
Other
Matters.
Adjustment or Recovery of Payments.
We do not
have a formal policy for adjusting or recovering payments if the
relevant performance measures upon which they are based are
restated or otherwise adjusted in a manner that would reduce the
size of an award or payment. Under Section 304 of the
Sarbanes-Oxley Act, if the Companys financials must be
restated as a result of misconduct, then our the chief executive
officer and chief financial officer must repay bonuses,
incentive-based compensation, equity based compensation, and
stock sale profits if received during the
12-month
period following the initial filing of the financials. If this
situation occurs we would expect to recover such awards. In
other events we would review the situation in light of the
responsibility of the individuals involved and the extent to
which the award or payment to individuals not responsible
nevertheless represented appropriate compensation for their
services.
Tax, Accounting and Regulatory
Considerations.
We take tax, accounting, and
regulatory requirements into consideration in choosing the
particular elements of our compensation and in the procedures we
use to set and pay those elements. As discussed above in
connection with setting the type of long-term equity incentive
awards, the financial statement presentation of options prior to
2006 compared to other equity awards played a part in our
selection of long-term equity compensation vehicles.
We want to pay compensation in the most tax-effective manner
reasonably possible and therefore also take tax considerations
into account. We consider the requirements of
Sections 162(m) and 409A of the Code. Section 162(m)
provides that compensation in excess of $1,000,000 annually for
any of the five most highly-paid executive officers will not be
deductible for purposes of U.S. corporate income taxes
unless it is performance based compensation and is
paid pursuant to a plan and procedures meeting certain
requirements
II-16
of the Code. Our Bonus Plan and the Incentive Plan are designed
in a form so that eligible payments under those plans will
qualify as deductible performance-based compensation. Since we
want to promote, recognize and reward performance which
increases stockholder value, we rely heavily on
performance-based compensation programs which will normally meet
the requirements for performance-based compensation
under Section 162(m). However, we may pay compensation that
does not satisfy the requirements of Section 162(m) if we
believe that it is in the best overall interests of the Company.
Section 409A provides that deferred compensation (including
certain forms of equity awards) are subject to additional income
tax and interest unless it is paid pursuant to a plan and
procedures meeting certain requirements of the Code. Our Bonus
Plan, Incentive Plan, Supplemental Plan, Severance Plan and
employment agreements with our executive officers have been
revised to conform to these new requirements.
Stock Ownership Guidelines.
In 2006, we
adopted stock ownership guidelines for our directors. These
guidelines provide for all directors to own at least
4,000 shares of the common stock prior to May 1, 2007.
In light of the historical significant stock ownership of our
executive officers, we have not adopted a policy for our
executive officers.
SUMMARY
COMPENSATION TABLE
The table below sets forth the cash and non-cash compensation
for the last fiscal year awarded to or earned by our named
executive officers.
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Non-Equity
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Incentive
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All
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Name and
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Option
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Plan
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Other
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Principal Position
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Year
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|
Salary
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|
Bonus
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|
|
Stock Awards
|
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|
Awards
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|
Compensation
|
|
|
Compensation(1)
|
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Total
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Gary W. Rada,
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|
2006
|
|
|
$
|
420,000
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
380,730
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|
|
$
|
17,653
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|
|
$
|
818,383
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|
President and Chief Executive
Officer
|
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Timothy J. Benson,
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2006
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|
$
|
167,000
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
64,880
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|
|
$
|
6,729
|
|
|
$
|
238,609
|
|
Vice President, Treasurer and
Chief Financial Officer(2)
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|
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Timothy F. Gower,
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2006
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|
$
|
255,847
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
133,126
|
|
|
$
|
12,831
|
|
|
$
|
401,804
|
|
Senior Vice President, Operations
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Jarett A. Misch,
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2006
|
|
|
$
|
183,000
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
71,096
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|
$
|
6,790
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|
|
$
|
260,886
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Former Vice President, Controller
and Chief Accounting Officer(3)
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(1)
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The compensation reported represents contributions to vested and
unvested defined contribution plans and the Supplemental Plan
and car allowances.
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(2)
|
|
Mr. Benson was appointed Vice President, Treasurer and
Chief Financial Officer on February 19, 2007. In connection
with such appointment, Mr. Bensons annual base salary
was set at $210,000 and his cash bonus under the Bonus Plan was
established as between 40% and 150% of his target bonus of 35%
of his annual salary.
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(3)
|
|
Mr. Misch resigned on February 16, 2007. See
Separation Agreement with Jarett A. Misch on
page II-24.
|
The salary, stock awards and non-equity incentive plan (Bonus
Plan) and other compensation are described more fully in the
CD&A section. We set each of base salary and annual bonus
and long-term equity incentives separately in light of our
evaluation of the competitive situation, the named executive
officers performance and experience, the levels of those
compensation elements of peer companies and the total
compensation package for the named executive officer. That
process determines the mix of base salary, annual bonus and
long-term incentives for each of our executive officers. Our
policy is to target executive officers base salary and
annual bonus to be at about the 70th percentile of our peer
group companies.
II-17
GRANTS OF
PLAN-BASED AWARDS
The following table shows, for our last fiscal year, certain
information regarding plan-based awards granted to the named
executive officers.
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Estimated
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Estimated
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Estimated
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All
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All Other
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Future
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|
Future
|
|
|
Future
|
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|
Other
|
|
|
Option
|
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|
|
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|
Payout
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|
Payout
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Payout
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Stock
|
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|
Awards:
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|
Grant
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|
|
|
|
Under
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Under
|
|
|
Under
|
|
|
Awards:
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Number
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|
Exercise
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|
|
Date
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|
|
|
|
|
|
Non-Equity
|
|
|
Non-Equity
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|
Non-Equity
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|
|
Number of
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of
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|
|
or Base
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|
Fair
|
|
|
|
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Shares
|
|
|
Securities
|
|
|
Price of
|
|
|
Value of
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|
|
|
Plan
|
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|
Plan
|
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|
Plan
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|
|
of Stock
|
|
|
Underlying
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|
|
Option
|
|
|
Stock and
|
|
|
|
Grant
|
|
|
Awards;
|
|
|
Awards;
|
|
|
Awards;
|
|
|
or Units
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|
|
Options
|
|
|
Awards
|
|
|
Option
|
|
Name
|
|
Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
(#)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
Awards
|
|
(a)
|
|
(b)
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|
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(c)
|
|
|
(d)
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(e)
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|
(i)
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(j)
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|
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(k)
|
|
|
(l)
|
|
|
Gary W. Rada
|
|
|
1/31/06
|
|
|
$
|
117,600
|
|
|
$
|
294,000
|
|
|
$
|
441,000
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
$
|
71,910
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|
Timothy J. Benson
|
|
|
1/31/06
|
|
|
|
20,040
|
|
|
|
50,100
|
|
|
|
75,150
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
47,940
|
|
Timothy F. Gower
|
|
|
1/31/06
|
|
|
|
41,120
|
|
|
|
102,800
|
|
|
|
154,200
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
59,925
|
|
Jarett A. Misch
|
|
|
1/31/06
|
|
|
|
21,960
|
|
|
|
54,900
|
|
|
|
82,350
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
47,940
|
|
The grant date set forth in the table above refers to the date
our Board, based upon recommendations of the Compensation
Committee, approved our Bonus Plan for 2006 and granted the
restricted stock awards listed in column (i) of the table.
Threshold, target and maximum awards under non-equity incentive
compensation plans refer to the awards under our Bonus Plan for
2006. A description of the performance-based conditions and
criteria potential for determining amounts payable with respect
to the Bonus Plan for 2006 are contained in the CD&A. The
actual bonus paid under the Bonus Plan for 2006 is shown in the
Non-Equity
Incentive Plan Compensation column of the Summary Compensation
Table on
page II-17.
The stock awards consisted of restricted stock grants that are
subject to performance vesting as follows: (a) 50% if we
achieve a return on invested capital (ROIC) of at least 12.5%
but less than 13.0% for any rolling 12 consecutive-month period
beginning after January 28, 2006 and ending on or before
the earlier of (i) a specified change of control and
(ii) February 2, 2009; (b) 75% if the ROIC for
any such period is at least 13.0% but less than 13.5%; and
(c) 100% if the ROIC for any such period is 13.5% or above.
The restricted stock grants are forfeited in the event the ROIC
targets are not achieved prior to a change of control.
II-18
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information, as to each
of the named executive officers, concerning the number of
outstanding equity awards as of the end of our last fiscal year.
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Option Awards
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Stock Awards
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Equity
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Incentive
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Equity
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Plan
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Incentive
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Awards:
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Plan
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Market or
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Awards:
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Payout
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Number of
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Value
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Unearned
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of
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Number
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Market
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Shares,
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Unearned
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Number of
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Number of
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of Shares
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Value of
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Units or
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Shares,
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Securities
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Securities
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or Units
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Shares or
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Other
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Units or
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Underlying
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Underlying
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of Stock
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Units of
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Rights
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Other
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Unexercised
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Unexercised
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Option
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That Have
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Stock
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That
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Rights
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Options
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Options
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Exercise
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Option
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Not
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That Have Not
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Have Not
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That Have
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(#)
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(#)
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Price
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Expiration
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Vested
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Vested
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Vested
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Not Vested
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Name
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Exercisable
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Unexercisable
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($)
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Date
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(#)
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($)
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(#)
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($)(1)
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(a)
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(b)
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(c)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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Gary W. Rada
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28,000
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$
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11.90
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4-14-2014
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9,000
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$
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76,410
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36,000
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$
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6.38
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7-16-2013
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2,000
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$
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16,980
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34,000
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$
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2.75
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1-28-2013
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50,000
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$
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3.76
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4-23-2012
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Timothy J. Benson
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3,000
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$
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11.90
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4-14-2014
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6,000
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$
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50,940
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4,000
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$
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6.38
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7-16-2013
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1,500
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$
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12,735
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1,000
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$
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3.76
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4-23-2012
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Timothy F. Gower
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12,000
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$
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11.90
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4-14-2014
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7,500
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$
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63,675
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16,000
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$
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6.38
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7-16-2013
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1,334
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$
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11,326
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12,000
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$
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2.75
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1-28-2013
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30,000
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$
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3.76
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4-23-2012
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Jarett A. Misch
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3,000
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$
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11.90
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4-14-2014
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6,000
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$
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50,940
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4,000
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$
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6.38
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7-16-2013
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1,834
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$
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15,571
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2,200
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$
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3.76
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4-23-2012
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(1)
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As of fiscal year-end based upon the closing price of the Common
Stock on February 2, 2007 ($8.49 per share). See
Item 3 of the accompanying
Schedule 14D-9
for information regarding expected payouts if the Merger
contemplated by the Merger Agreement is completed.
|
OPTION
EXERCISES AND STOCK VESTED
The following table sets forth certain information, as to each
of the named executive officers, concerning the exercise of
option awards and the vesting of stock awards during our last
fiscal year.
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Option Awards
|
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Stock Awards
|
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Number of
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Number of
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Shares
|
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Value
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Shares
|
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Value
|
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Acquired
|
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Realized
|
|
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Acquired
|
|
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Realized
|
|
|
|
on Exercise
|
|
|
on Exercise
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
Gary W. Rada
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|
|
0
|
|
|
|
0
|
|
|
|
1,000
|
|
|
$
|
7,620
|
|
Timothy J. Benson
|
|
|
0
|
|
|
|
0
|
|
|
|
750
|
|
|
$
|
5,780
|
|
Timothy F. Gower
|
|
|
0
|
|
|
|
0
|
|
|
|
666
|
|
|
$
|
5,074
|
|
Jarett A. Misch
|
|
|
0
|
|
|
|
0
|
|
|
|
916
|
|
|
$
|
7,067
|
|
II-19
NONQUALIFIED
DEFERRED COMPENSATION
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Registrant
|
|
|
Earnings
|
|
|
Aggregate
|
|
|
Balance
|
|
|
|
Contributions
|
|
|
in Last
|
|
|
Withdrawals/
|
|
|
at Last
|
|
|
|
in Last FY
|
|
|
FY
|
|
|
Distributions
|
|
|
FYE
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
(a)
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
Gary W. Rada
|
|
$
|
5,606
|
|
|
$
|
7,501
|
|
|
$
|
0
|
|
|
$
|
27,866
|
|
Timothy J. Benson
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Timothy F. Gower
|
|
$
|
783
|
|
|
$
|
1,329
|
|
|
$
|
0
|
|
|
$
|
7,691
|
|
Jarett A. Misch
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
We adopted the Plan to provide retirement benefits for our
officers (including executive officers) on the same basis, in
proportion to pay, as we provide retirement benefits under our
401(k) Plan to all our salaried employees generally. We
contribute to the Supplemental Plan the difference between the
amount that would have been contributed to their 401(k) Plan
accounts but for the Code limitations, and the contributions
actually made to their 401(k) Plan accounts. At the time an
executive officer becomes a participant, he elects whether
distribution will occur on a designated date, or upon
termination of employment or a designated date thereafter.
Executive officers do not make contributions to the Supplemental
Plan.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The following section provides certain information regarding the
potential payments upon termination or change of control to each
of our named executive officers, applying the assumptions that
the triggering event took place on February 3, 2007, the
last business day of our last completed fiscal year, and the
price per share of our common stock was the closing market price
as of that date ($8.49 per share). For information regarding the
change of control benefits potentially payable to executive
officers of the Company as a result of the Offer, please refer
to Item 3 of the accompanying
Schedule 14D-9.
Vesting
or Payment of Benefits on Retirement, Disability or
Death.
Bonus Plan.
Bonuses under the Bonus Plan may
be payable in part on certain terminations of employment.
Generally, no bonus is paid if employment terminates before the
last day of the fiscal year. However a pro rata bonus, based on
the time the executive officer is actually employed during the
fiscal year, is payable if termination of employment occurs by
retirement, death or disability. The Company treats any
termination of employment other than for cause after
age 63, or after age 55 with 15 years of service,
as retirement for this purpose. If the retirement,
death or disability of an executive officer had occurred on the
last business day of fiscal 2006, the pro-rata bonus would be
the entire bonus in the same amount as shown in column
(g) of the Summary Compensation Table above.
Incentive Plan.
Generally awards under the
Incentive Plan are forfeited if employment terminates before the
vesting date provided in the applicable award agreement.
However, the award agreements provide that upon termination of
employment for death, retirement, or disability awards will
continue to vest for one year, subject to the performance
metrics if applicable.
Change of
Control Benefits for Executive Officers.
We have an employment agreement with each of Mr. Rada, and
Mr. Gower and had an employment agreement with
Mr. Misch
3
as of February 3, 2007. We also have an employment
agreement with Mr. Michael Perri, who was appointed as the
Senior Vice President Merchandising and Marketing on
April 30, 2007
3
Mr. Misch
resigned as an officer of the Company pursuant to a Separation
Agreement dated as of February 16, 2007. The actual
separation benefits for Mr. Misch pursuant to the
Separation Agreement, superseding his employment agreement, are
described under Separation Agreement with Jarett A.
Misch on page II-24.
II-20
subsequent to the end of the Companys 2007 fiscal year. In
connection with the execution of the Merger Agreement, each of
Messrs. Rada, Gower and Perri entered into an amendment to
his employment agreement, effective upon consummation of the
Merger, extending the term thereof and amending certain
provisions therein. In addition, in connection with the
execution of the Merger Agreement, Mr. Benson and certain
non-executive officers of the Company entered into agreements
with the Company and Parent, effective upon consummation of the
Merger, that, among other things, provide for the Companys
continued employment at will of such persons following the
closing of the Merger. The current employment agreements of
Messrs. Rada and Gower are described below. The current
employment agreement of Mr. Perri, the amendments to the
employment agreements of Messrs. Rada, Gower and Perri and
the agreements with Mr. Benson and certain non-executive
officers of the Company are described in more detail in the
accompanying
Schedule 14D-9
under Item 3(a) Arrangements with Current Executive
Officers and Directors of the Company Current
Employment Agreements, Amended Employment
Agreements; Agreement with Timothy Benson and
Agreements with Other Non-Executive Officers.
The current employment agreements with Messrs. Rada and
Gower provide for the continued employment of each in his
present capacity with the Company through April 8, 2009 for
Mr. Rada and April 7, 2008 for Mr. Gower,
provided that such term is automatically extended for subsequent
one-year terms unless either the executive officer or the
Company give written notice to the other of a desire not to
extend at least 60 days prior to the end of the initial
term or any additional term, as applicable. The agreements also
provide for severance benefits to be paid. Upon certain types of
terminations of employment, whether before or after a change in
control, Mr. Benson, who is not a party to an employment
agreement with the Company, is entitled to the benefits of the
Severance Plan discussed on
page II-13.
Severance Payments.
Under the terms of the
employment agreements with Mr. Rada and Mr. Gower, if
the executive officer is terminated without cause or resigns
with good reason during the term, he is entitled to receive:
(1) any accrued and unpaid salary and bonus and a prorated
bonus in respect of the fiscal year in which termination occurs,
calculated at the executive officers target bonus level;
(2) a severance payment, payable in cash in equal
installments over the Severance Period (as defined below) (or in
a lump sum payment upon a change of control), equal to the
quotient obtained by dividing the number of days in the
Severance Period by 365 times the sum of (x) the executive
officers then current annual base salary and (y) the
executive officers target bonus; (3) full
acceleration of vesting on stock options, restricted stock
(other than those with performance vesting) and any other awards
under any equity based incentive arrangement; and
(4) continuation of medical and health benefits for the
executive officer, his spouse and other dependents for the
Severance Period. The Severance Plan period for Mr. Rada is
the greater of 18 months or the remainder of the term;
provided that such period shall be 36 months if
Mr. Rada is terminated without cause or resigns
for good reason after a change of control. The
Severance Period for Mr. Gower is the greater of
12 months or the remainder of the term; provided that such
period shall be 18 months if such executive is terminated
without cause or resigns for good reason
after a change of control.
The severance payments under Mr. Mischs employment
agreement, which was terminated in connection with the
Separation Agreement described below, provided for severance
payments substantially similar to those provided to
Mr. Gower.
A change of control is defined in the employment
agreements in substantially the same way as in the Severance
Plan, described in the Compensation Discussion and Analysis
above on
page II-13,
except that the employment agreements add as change of control
events:
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|
a merger or consolidation of the Company without 75% stockholder
continuity of interest (excluding certain
recapitalizations), and
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|
|
stockholder approval of a plan of complete liquidation.
|
The employment agreements also provide that the Company will pay
an amount necessary to reimburse each executive officer on an
after-tax basis, for any excise tax due under Section 4999
of the Code as a result of such payment constituting a
parachute payment under Section 280G of the
Code. Finally, to the extent required by Section 409A of
the Code, any severance payment to an executive officer shall
not be made before
II-21
six months after the executive officers termination of
employment; provided that any such payment that is delayed must
be deposited in a trust pending payment to the executive officer.
The additional benefits provided upon certain terminations after
a change in control are intended to assure the retention and
performance of the executive officers if a change in control of
the Company is pending or threatened. Specifically, for
termination of employment by the Company without
cause or by the executive officer with good
reason, the additional Severance Period after a change in
control is designed to reduce the dissatisfaction of our
executive officers that might otherwise arise from the personal
uncertainty caused by a change in control, to encourage the
executive officers full attention and dedication to the
Company and to provide the executive officer with competitive
compensation and benefits following a change in control. The
Severance Period for each executive officer is set at a period
intended to cover the period it might take an executive officer
to find competitive employment and to avoid giving the
post-change Company a financial incentive to avoid severance
obligations by keeping an executive officer employed in an
unproductive capacity until his entitlement to these benefits
expires. The provision for vesting and payment is intended to
avoid the risk of potential nonpayment by the post-change
Company. Finally, the continuation of benefits for Severance
Period is intended to cover the period that it might take an
executive officer to find employment providing comparable
benefits and to cushion the executive officer and his family
against the possibility that no subsequent employment would
provide comparable benefits.
The applicable amounts of these benefits and the other benefits,
described here are shown in the table herein for each executive
officer.
Applicable Restrictive Covenants.
In exchange
for the above benefits, the employment agreements impose certain
obligations on the executive officer that apply during
employment (before or after a change of control) and after any
termination of employment, including terminations of employment
before any change of control happens, and regardless of the
reason for termination of employment. These are an obligation to
maintain the confidentiality of Company confidential
information, not to engage directly or indirectly in competition
with the Company, and not to solicit employees, customers,
vendors and suppliers away from the Company or otherwise
interfere with the Companys employee, customer, vendor and
supplier relationships. A competing business includes any
business or entity (a) engaged in the operation of retail
stores for the primary purpose of selling greeting cards, gift
wrap and party supplies and which operates such retail stores in
any market in which the Company is operating a retail store at
the time of the executive officers termination of
employment, or a market into which the executive officer knows
the Company is intended to enter or (b) engaged in the
primary business of the manufacture and distribution of greeting
cards, gift wrap and party supplies. The executive officer
agrees that these covenants may be specifically enforced against
him by injunction.
Tabular Disclosures of Potential Benefits Paid or Provided
Upon Change in Control
. The following tables
tally the benefits that would be paid or provided for each of
the named executive officers if a change of control and a
without cause or good reason
termination, a voluntary resignation without good
reason, or a termination for cause, occurred
on February 3, 2007, the last business day of our fiscal
2006 year, apply the closing price of Company stock on that
day (which was $8.49 per share), but do not include the value of
previously vested equity awards as disclosed in the table of
Outstanding Equity Awards at Fiscal Year End where such payment
or benefit is not enhanced in vesting or its vesting not
accelerated in connection with the triggering event. Cost of
outplacement is estimated based on the named executive
officers base compensation and the outplacement
arrangements the Company currently has in effect. For purposes
of the Section 4999
gross-up,
the amount in the table is based on the assumptions of an excise
tax rate of 20%, a marginal federal income tax rate of 35.0%, a
1.45% Medicare tax rate, state income tax rate applicable to the
named executive officer, and the assumptions that no amounts
will be attributed to reasonable compensation before or after
the change of control and that no value will be attributed to
the named executive officers non-competition covenant. The
value of health plan benefits is based upon the current cost of
such benefits to the Company in light of the coverage options
elected and assumes that the executive officers will continue
paying applicable employee (or retiree) premiums for such
coverage for the maximum period permitted by the Agreement. The
table also assumes that the named executive officer will not
incur legal fees or related costs in enforcing his rights under
his employment agreement or the Severance Plan, as applicable.
For information regarding the
II-22
change of control benefits potentially payable to executive
officers of the Company as a result of the Offer, please refer
to Item 3 of the accompanying
Schedule 14D-9.
Change of
Control Benefits Gary W. Rada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
For Cause
|
|
|
Change
|
|
|
|
Termination
|
|
|
Termination
|
|
|
in Control
|
|
|
Bonus
|
|
$
|
631,000
|
|
|
$
|
0
|
|
|
$
|
882,000
|
|
Equity award vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Restricted Stock
|
|
$
|
16,980
|
|
|
|
Cancelled
|
|
|
$
|
16,980
|
|
Severance payment
|
|
$
|
902,000
|
|
|
|
Cancelled
|
|
|
$
|
1,260,000
|
|
Payment of 401(k) Forfeiture
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement
|
|
$
|
21,000
|
|
|
|
Cancelled
|
|
|
$
|
42,000
|
|
Benefit plan continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical (including dental)
|
|
$
|
4,454
|
|
|
|
Cancelled
|
|
|
$
|
8,909
|
|
Disability
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Life insurance
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Excise tax
gross-up
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
800,711
|
|
Change of
Control Benefits Timothy J. Benson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
For Cause
|
|
|
Change
|
|
|
|
Termination
|
|
|
Termination
|
|
|
in Control
|
|
|
Bonus
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
75,150
|
|
Equity award vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Restricted Stock
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
12,735
|
|
Severance payment
|
|
$
|
83,000
|
|
|
|
Cancelled
|
|
|
$
|
251,000
|
|
Payment of 401(k) Forfeiture
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement
|
|
$
|
7,000
|
|
|
|
Cancelled
|
|
|
$
|
21,000
|
|
Benefit plan continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical (including dental)
|
|
$
|
4,193
|
|
|
|
Cancelled
|
|
|
$
|
12,579
|
|
Disability
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Life insurance
|
|
$
|
277
|
|
|
|
Cancelled
|
|
|
$
|
832
|
|
Excise tax
gross-up
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
II-23
Change of
Control Benefits Timothy F. Gower
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
For Cause
|
|
|
Change
|
|
|
|
Termination
|
|
|
Termination
|
|
|
in Control
|
|
|
Bonus
|
|
$
|
113,000
|
|
|
$
|
0
|
|
|
$
|
194,000
|
|
Equity award vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Restricted Stock
|
|
$
|
11,326
|
|
|
|
Cancelled
|
|
|
$
|
11,326
|
|
Severance payment
|
|
$
|
283,000
|
|
|
|
Cancelled
|
|
|
$
|
486,000
|
|
Payment of 401(k) forfeiture
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement
|
|
$
|
16,000
|
|
|
|
Cancelled
|
|
|
$
|
28,000
|
|
Benefit plan continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical (including dental)
|
|
$
|
6,243
|
|
|
|
Cancelled
|
|
|
$
|
12,486
|
|
Disability
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Life insurance
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Excise tax
gross-up
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Change of
Control Benefits Jarett A. Misch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
For Cause
|
|
|
Change
|
|
|
|
Termination
|
|
|
Termination
|
|
|
in Control
|
|
|
Bonus
|
|
$
|
64,000
|
|
|
$
|
0
|
|
|
$
|
82,000
|
|
Equity award vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Restricted Stock
|
|
$
|
15,571
|
|
|
|
Cancelled
|
|
|
$
|
15,571
|
|
Severance payment
|
|
$
|
213,000
|
|
|
|
Cancelled
|
|
|
$
|
275,000
|
|
Payment of 401(k) Forfeiture
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement
|
|
$
|
16,000
|
|
|
|
Cancelled
|
|
|
$
|
21,000
|
|
Benefit plan continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical (including dental)
|
|
$
|
10,040
|
|
|
|
Cancelled
|
|
|
$
|
12,909
|
|
Disability
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Life insurance
|
|
$
|
0
|
|
|
|
Cancelled
|
|
|
$
|
0
|
|
Excise tax
gross-up
|
|
$
|
0
|
|
|
|
TBD
|
|
|
$
|
0
|
|
Separation Agreement with Jarett A. Misch.
We
entered into a Separation Agreement dated as of
February 16, 2007 (the Separation Agreement)
with Mr. Jarett A. Misch, our former Chief Accounting
Officer, pursuant to which Mr. Misch resigned all of his
positions as an officer and employee of the Company. Pursuant to
the Separation Agreement, we agreed to pay Mr. Misch a
gross amount of $269,891, minus customary payroll deductions, as
follows: (i) $118,935 on the six month anniversary of the
Separation Agreement; and (ii) the remaining $150,956 paid
in equal installments in accordance with our payroll practices
over the period commencing on the sixth month anniversary and
ending on April 7, 2008; provided that immediately prior to
a change of control, any remaining payments would be paid in a
single lump sum payment. Mr. Misch will also be entitled to
continued participation in the our health and medical benefit
plans through April 7, 2008 unless he becomes eligible
under comparable plans prior to that date. We also accelerated
the vesting of all unvested stock options and restricted stock
(other than performance shares) held by Mr. Misch and
extended the exercise period of all stock options held by Mr.
Misch, which would have expired 90 days after termination
of Mr. Mischs employment, until 225 days after
the date of the Separation Agreement.
II-24
In connection with the Separation Agreement, Mr. Misch
agreed to serve as a consultant of the Company for one month,
and we have agreed to pay Mr. Misch $15,250 for such
service. The Separation Agreement also contains mutual releases
and confidentiality and non-compete provisions.
DIRECTOR
COMPENSATION
The table below summarizes the compensation paid by the Company
to non-employee directors for our last fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid in
|
|
|
Stock
|
|
|
All Other
|
|
|
|
|
Name
|
|
Cash ($)
|
|
|
Awards
($)
4
|
|
|
Compensation ($)
|
|
|
Total ($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(g)
|
|
|
(h)
|
|
|
Mone Anathan
|
|
$
|
20,625
|
|
|
$
|
4,100
|
|
|
$
|
9,500
|
|
|
$
|
34,225
|
|
Richard E. George
|
|
$
|
60,000
|
|
|
$
|
0
|
|
|
$
|
16,500
|
|
|
$
|
76,500
|
|
Ben Evans
|
|
$
|
34,500
|
|
|
$
|
0
|
|
|
$
|
17,000
|
|
|
$
|
51,500
|
|
Peter M. Holmes
|
|
$
|
27,500
|
|
|
$
|
0
|
|
|
$
|
15,500
|
|
|
$
|
43,000
|
|
Martin G. Mand
|
|
$
|
32,500
|
|
|
$
|
0
|
|
|
$
|
14,500
|
|
|
$
|
47,000
|
|
Patrick W. OBrien
|
|
$
|
27,500
|
|
|
$
|
0
|
|
|
$
|
18,000
|
|
|
$
|
45,500
|
|
Gary W. Rada
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Robert S. Sandler
|
|
$
|
27,500
|
|
|
$
|
0
|
|
|
$
|
16,500
|
|
|
$
|
44,000
|
|
Directors who are officers of the Company do not receive any
additional compensation for their services as directors.
Non-employee directors of the Company receive the following
compensation:
|
|
|
|
|
a quarterly retainer of $6,875;
|
|
|
|
a fee of $1,000 for each Board meeting attended in person and
$500 for each Board meeting attended by telephone;
|
|
|
|
a fee of $1,000 for each committee meeting attended in person
and $500 for each committee meeting attended by telephone, in
each case only if the committee met on a day other than a day on
which the Board met; and
|
|
|
|
reimbursement of reasonable expenses to attend Board and
committee meetings.
|
The Chairmen of the Audit Committee and the Compensation
Committee each receive an additional quarterly fee of $1,750 and
$1,250, respectively. The Chairman of the Board receives an
additional $8,125 per quarter.
Non-employee directors participate in one equity compensation
plan of the Company, the 2002 Non-Employee Directors Stock
Option Plan. The Board has a policy for the annual grant of
non-qualified stock options to purchase 5,000 shares of the
Companys Common Stock to continuing non-employee
directors. All options granted to such directors will have an
exercise price equal to 100% of the fair market value on the
date of grant and will vest over a three-year period from the
grant date. On April 24, 2007, each non-employee director
was granted stock options to purchase 5,000 shares with an
exercise price of $11.52 per share.
Additionally, the Board has a policy that the Non-Executive
Chairman of the Board will receive at the same time additional
non-qualified stock options in the amount of 5,000 shares,
which options will have the same exercise price and will also
vest over a three-year period from the grant date. The
Non-Executive Chairman received this additional stock option
grant on April 24, 2007.
4
The
number of option awards outstanding at the end of the last
completed fiscal year for each Director is as follows: 5,000 for
Mr. Anathan, 40,000 for Mr. George, 33,000 for
Mr. Evans, 30,000 for Mr. Holmes, 33,000 for
Mr. Mand, 25,000 for Mr. OBrien, 148,000 for
Mr. Rada, and 32,500 for Mr. Sandler.
II-25
COMPENSATION
COMMITTEE REPORT
On behalf of the Board of Directors, the Compensation Committee
of the Board of Directors oversees the Companys
compensation programs. In fulfilling its oversight
responsibilities, the Compensation Committee has reviewed and
discussed the Compensation Discussion and Analysis included in
this information statement with management.
Based on the review and discussions referred to above, the
Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the
Companys Annual Report on
Form 10-K
for the fiscal year ended February 3, 2007, and its proxy
statement on Schedule 14A filed in connection with the
Companys 2007 Annual Meeting of Stockholders.
This report shall not be deemed to be incorporated by reference
by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and
shall not otherwise be deemed filed under such laws.
Compensation Committee
Martin G. Mand, Chairperson
Peter Holmes
Robert S. Sandler
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2006, none of the Companys executive
officers served on the board of directors of any entities whose
directors or officers serve on the Companys Compensation
Committee. No current or past executive officers of the Company
or its subsidiaries serve on the Companys Compensation
Committee.
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the
Companys directors, executive officers and persons who own
more than 10% percent of the Companys Common Stock
(collectively, Reporting Persons) to file reports of
ownership and changes in ownership of the Companys Common
Stock. Reporting Persons are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all
Section 16(a) reports that they file. Based solely on its
review of the copies of such reports received or written
representations from certain Reporting Persons, the Company
believes that during the fiscal year ended February 3,
2007, all Reporting Persons complied with all applicable filing
requirements.
AUDIT
COMMITTEE REPORT
The information contained in this report shall not be deemed
to be soliciting material or to be filed
with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing
under the Securities Act of 1933, as amended, or the 1934
Securities Exchange Act, as amended, except to the extent that
the Company specifically incorporates it by reference in such
filing.
The following is the report of the Audit Committee with respect
to the Companys audited financial statements for the
fiscal year ended February 3, 2007, which include the
consolidated balance sheets of the Company as of
February 3, 2007 and January 28, 2006, and the related
consolidated statements of operations, stockholders equity
and cash flows for the 53 weeks ended February 3, 2007
and 52 weeks ended January 28, 2006 and the notes
thereto.
Review
with Management
The Audit Committee oversees the Companys financial
reporting process on behalf of the Board of Directors.
Management has the primary responsibility for the financial
statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities,
the Audit Committee reviewed the Companys audited
financial statements with management, including a discussion of
the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
II-26
Review
and Discussion with Independent Auditors
The Audit Committee has discussed with McGladrey &
Pullen LLP, the Companys independent auditors, the matters
required to be discussed by SAS 61 (Codification of Statements
on Accounting Standards) which include, among other items,
matters related to the conduct of the audit of the
Companys financial statements.
The Audit Committee reviewed with the independent auditors, who
are responsible for expressing an opinion on the conformity of
audited financial statements with accounting principles
generally accepted in the United States, their judgments as to
the quality, not just the acceptability, of the Companys
accounting principles and such other matters as are required to
be discussed with the Audit Committee under generally accepted
auditing standards. In addition, the Audit Committee has
discussed with the independent auditors the auditors
independence from management and the Company, including the
matters in the written disclosures required by the Independence
Standards Board, and considered the compatibility of non-audit
services with the auditors independence. The Audit
Committee discussed with the Companys internal and
independent auditors the overall scope and plans for their
respective audits. The Audit Committee met with the internal and
independent auditors, with and without management present, to
discuss the results of their examinations, their evaluations of
the Companys internal controls, and the overall quality of
the Companys financial reporting.
Conclusion
In reliance on the reviews and discussions referred to above,
the Audit Committee recommended to the Board of Directors (and
the Board has approved) that the audited financial statements be
included in the Annual Report on
Form 10-K
for the year ended February 3, 2007 for filing with the
Securities and Exchange Commission. The Committee has selected,
subject to stockholder approval, McGladrey & Pullen
LLP as the Companys independent auditors for the fiscal
year ending February 2, 2008.
MEMBERS OF THE AUDIT COMMITTEE
Ben Evans (Chairman)
Mone Anathan
Patrick OBrien
RELATED
PARTY TRANSACTIONS
The Company does not have any information relating to certain
relationships or related transactions that is required to be
reported by Item 404 of
Regulation S-K.
The Audit Committee has not adopted specific written policies or
procedures governing the review, approval or ratification of
related-party transactions. As a matter of practice, however,
the Audit Committee reviews, approves or ratifies transactions
with related parties when required by applicable law, regulation
or Nasdaq rule and when the Audit Committee otherwise considers
it appropriate. When conducting a review of a potential
related-party transaction, the Audit Committees practice
is to evaluate whether a related party (including a director,
executive officer, or significant stockholder) will have a
direct or indirect interest in a transaction in which the
Company may be a participant. Where the Audit Committee
determines that such proposed transaction involves a related
party, the Audit Committee reviews any and all information it
deems necessary and appropriate to evaluate the fairness of the
transaction to the Company and its stockholders (other than the
interested related party to such transaction), and may consider,
among other things, the following factors: the related
partys relationship to the Company and direct or indirect
interest in the transaction, both objective (for example, the
dollar amount of the related partys interest) and
subjective (for example, any personal benefit not capable of
quantification); whether the interested transaction is on terms
no less favorable than terms generally available to an
unaffiliated third-party under the same or similar
circumstances; if applicable, the availability of other sources
of comparable products or services; the benefits to the Company
of the proposed interested transaction; and the impact on a
directors independence in the event the related party is a
director, an immediate family member of a director or a member
of a directors household or an entity in which a director
is a partner, member, stockholder or officer.
II-27
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